Does anybody still think we're not a socialist republic? Then read this:
http://biz.yahoo.com/ap/081028/financial_meltdown.html
This line is particularly chilling:
"Though there are limits on how much Washington can pressure banks, (Perino) noted that banks are regulated by the federal government.
'They will be watching very closely ...', she said."
I hear jackboots.
Bank regulators' job is not to tell banks what business decisions to make. Their job, as my boss back when I was among their ranks told me, is to shoot the wounded.
Some are drinking the administration's kool-aid, the flavor that says if the banks are getting taxpayer dollars, being told what to do with them is just one of the strings that rightfully should be attached to a handout.
Okay, let's try that logic on you, dear reader: let's assume you were one of the lucky recipients of a tax rebate check last summer. Let's further assume you wanted to save it for your kids' education, or pay down your credit card balance. Instead, some fed goon in Ray-Ban aviators shows up at your door, escorts you to a dark sedan with heavily tinted windows, drives you to the mall, and makes you spend every last dime on more crap you don't need.
How would you feel?
Attaching those strings up front to the bank deal might have been okay, except Paulson knew no bank would take the money if he dictated their business. Heck, just the way he doled it out was totalitarian.
In the UK (from whom Paulson stole the idea of nationalizing banks, or "injecting capital" as we like to call it on this side of the pond), they went to the nine largest banks and said, take it if you want it. Five did, and their stocks got hammered. The other four declined, and theirs only got slapped around a bit.
So Paulson figured our banks would be skittish about taking the aid. So he sits the nine largest US banks down in a private meeting and says, you're taking this money - period - but we'll "leak" that you were forced to, so investors won't think you actually needed the dough, even though we know some of you desperately do. Then other banks will see that your stock prices didn't tank after you got the capital infusion, and they'll belly up to the bar.
First they force banks to take capital they don't want (with some strings attached, by the way, like exec comp limits). The banks - who are only in this position in the first place because they got punch-drunk on bad loans - have sobered up and now don't want to make those loans, especially during a recession, when credit quality across the spectrum deteriorates. Instead, they want to insulate against the further write-downs that are sure to come, de-leverage their bloated balance sheets, and build capital - and also perhaps acquire some of the weak sisters. In short, return the industry to health.
Instead, Paulson's spiking the punch. And with everybody at the party honoring the AA pledge, he's hinting at using his jack-booted bouncers to - instead of doing their jobs and throwing out the unruly ones - force-feeding the booze to the crowd.
More bad loans are not the answer to this economy - quite the opposite. Paulson, Bush, et al don't get that though. They think we can consume our way out of any mess. Not this time.
The other troubling aspect to this is that it further reduces transparency at a time when we desperately need it in the markets. They're not saying who actually might need the capital among these first nine, and they're not revealing the ones that are approaching them, but getting rejected.
Why?
For fear their stock prices might fall once the news gets out that they're 1) short of capital and 2) so weak that even Uncle Sam won't take a flier on them.
In other words, the banks are hiding information from their shareholders and depositors about how weak they are - information those constituencies have a right to know. And the very regulators that are charged with preventing them from doing that are colluding with them in the effort.
Tuesday, October 28, 2008
Friday, October 24, 2008
An Outrage
After I learned my Congressman's vote was bought by $64k of campaign contributions by financials the day of and day after the TARP vote, I sent him this e-mail. Vote your conscience. Dennis Moore is a criminal who should be removed from office and spend the rest of his life behind bars.
"Dear Congressman Moore,
I wrote you at the time of the TARP vote, urging you to vote against it.
You voted for it.
You then responded to me, and today, I responded to you.
Now, I've learned why you voted for the TARP.
Big finance bought your vote. For a lousy $64,000. For that amount of money, you sold your constituents and the rest of the American people down the river, to the tune of a trillion dollars.
Yet you have the audacity to post on your website the outrageous - if grammatically fractured (which should come as no surprise given your apparent intellectual impairment) words:
"We must change our budgeting practices that will put our future generations deeply in debt. Tough choices must be made, but if Kansas families have to live within a budget, and it's time the federal government did as well."
You'd get a "C" in a middle-school English class for those lines. But you'd get an "F" in economics.
Maybe you meant to say, "We must change our budgeting practices TO put our future generations deeply in debt." Because that's how you voted.
Why?
Because you sold your soul, and your constituents' tax dollars, for the $64,000 in campaign contributions that you received the day of your vote for the TARP and the day after from financial institutions that would benefit from your vote.
Your defense?
"So what? I've raised a million dollars in this campaign."
Yeah - one vote at a time.
You, sir, are a criminal, on the worst order. You should spend the rest of your natural life behind bars. It is a travesty that you have the gall to post the National Debt Clock on your website, with those fractured-English words quoted above.
A debt clock that you've been all too willing to accelerate through your own reckless spending.
Hey, Dennis - I've got a few extra bucks lying around, because I saw this crap coming and I'm short this market. Can I buy a vote or two? What's your going rate? Like the Bunny Ranch, or other houses of prostitution, do you have a menu that I can download, that will show me how much a vote on this bill or that would cost me? I might hit the bid for the right vote.
Don't bother sending it to me, though. I'm sure you've got your price, but I would never pay for your vote. You are despicable, and again, should spend the rest of your life in a Federal cell with your pal Barney Frank.
Rest assured that I will instead spend my dollars fighting tirelessly to remove you and your ilk from office, permanently.
Sincerely,
Brian Hague"
"Dear Congressman Moore,
I wrote you at the time of the TARP vote, urging you to vote against it.
You voted for it.
You then responded to me, and today, I responded to you.
Now, I've learned why you voted for the TARP.
Big finance bought your vote. For a lousy $64,000. For that amount of money, you sold your constituents and the rest of the American people down the river, to the tune of a trillion dollars.
Yet you have the audacity to post on your website the outrageous - if grammatically fractured (which should come as no surprise given your apparent intellectual impairment) words:
"We must change our budgeting practices that will put our future generations deeply in debt. Tough choices must be made, but if Kansas families have to live within a budget, and it's time the federal government did as well."
You'd get a "C" in a middle-school English class for those lines. But you'd get an "F" in economics.
Maybe you meant to say, "We must change our budgeting practices TO put our future generations deeply in debt." Because that's how you voted.
Why?
Because you sold your soul, and your constituents' tax dollars, for the $64,000 in campaign contributions that you received the day of your vote for the TARP and the day after from financial institutions that would benefit from your vote.
Your defense?
"So what? I've raised a million dollars in this campaign."
Yeah - one vote at a time.
You, sir, are a criminal, on the worst order. You should spend the rest of your natural life behind bars. It is a travesty that you have the gall to post the National Debt Clock on your website, with those fractured-English words quoted above.
A debt clock that you've been all too willing to accelerate through your own reckless spending.
Hey, Dennis - I've got a few extra bucks lying around, because I saw this crap coming and I'm short this market. Can I buy a vote or two? What's your going rate? Like the Bunny Ranch, or other houses of prostitution, do you have a menu that I can download, that will show me how much a vote on this bill or that would cost me? I might hit the bid for the right vote.
Don't bother sending it to me, though. I'm sure you've got your price, but I would never pay for your vote. You are despicable, and again, should spend the rest of your life in a Federal cell with your pal Barney Frank.
Rest assured that I will instead spend my dollars fighting tirelessly to remove you and your ilk from office, permanently.
Sincerely,
Brian Hague"
Check, Please!
As in, "checks and balances." Remember those? What happened to them? Did I go Rip van Winkle there, and miss the re-write of the Constitution?
Fed Chairman Ben Bernanke announced this week that the Fed will spend $600 billion to buy crap investments from money market mutual funds. This is outside of the $700 billion TARP.
On whose authority?
The Fed is broke - it's borrowing money in the markets, by having Treasury issue bonds, which they're doing at a gluttonous pace. So where will the money come from?
You know where.
The FDIC (which is also near-broke) already turned money market funds into bank accounts, by covering them with deposit insurance. Never mind the fact that money market funds aren't banks, which are the purview of the FDIC. And never mind the moral hazard of rewarding people who sought the higher yield of a money fund relative to a bank account, perfectly willing to live with the risk of placing their money uninsured.
Until, of course, they actually start losing it.
Banks are also the purview of the Fed. Not mutual funds. What's next, equity mutual funds? Hey, why not?
But what I really want to know is, where does Ben Bernanke get the authority to spend 600,000,000,000 taxpayer dollars? And why is no one outraged about this, besides me?
************
Meanwhile, on a related note, Hank Paulson has now announced that he'll use the TARP to buy into insurance companies too. What's next? This guy really does look like a buffoon these days - running around like a chicken with its head cut off. He has no earthly clue what he's doing, or what he'll do next. Might as well make some popcorn and just sit back and watch the show.
************
I was watching Bubblevision a few days ago, and Mark Haines was interviewing Mohamed El-Erian, the co-CEO of PIMCO, which is the largest bond-fund manager in the world. El-Erian is a smart dude, by the way. Haines asked him how the recent equity market carnage was going to impact the psyche of the average American.
El-Erian (I'm paraphrasing here): "Well, they're going to open their 401(k) statement, and they're going to decide to cut back, and consume less. And for the next five years or so, we're going to move to a more savings-based economy."
Haines (looking aghast): "If we move to a savings-based economy, what kind of economy do we have?"
A healthy one. The kind that, in 1982 when the savings rate was about 10%, spawned a nice, long, sustainable period of economic and stock market growth, with nary a bubble. Guys like Haines are part of the problem.
************
Did anyone else watch The Blame Game this week? You know, that entertaining game show on C-SPAN where our elected leaders waste more of our money by calling the "culprits" on the carpet and asking them inane questions, trying to obfuscate the fact that it is actually Congress itself that is to blame for most crises?
Now, I'm not saying that Alan "Mr. Bubble" Greenspan has no culpability in this mess, though his sin was not in opposing regulation so much as it was in encouraging speculative risk-taking by keeping money artificially cheap too long. The Godfather of Leverage should learn what a friend and I were discussing today at lunch: if you fill the ocean with chum, the sharks will feed. The sharks are doing nothing wrong in this instance; they are merely doing what sharks do. They do not need behavior-modifying regulation. They need their food source restricted. Stop dumping the chum, and they'll stop feeding on it.
And I'm not saying the SEC hasn't been asleep at the switch, nor the ratings agencies. I don't know why they picked on John Snow. For one thing, his successor bears far more guilt than he does, but of course Paulson, along with Bernanke, is the darling of our socialist government right now. So let's go after their predecessors. The other reason they shouldn't have picked on Snow is that, with a big smile on his face, he called them out, noting that he came before them pleading for curbs on Fannie and Freddie in 2003 and again in 2005, only to have them reject his pleas.
Rep. Frank Mica of Florida correctly pointed out that the blame lies with those who accepted sweetheart loans from Countrywide in favor of blocking regulation and pushing reckless lending, like Senate Banking Committee Chair Christopher Dodd did. Or those who took record amounts of money from Fannie Mae, like Senator Obama did. On that latter point, Mica complained that the final hearing on this matter isn't scheduled until November 20 - after the election.
But Committee Chairman Waxman called Mica's comments "political," and said that now is not the time to get political. Like all of this isn't political to begin with. Sadly, you won't see Mica's comments on the evening recaps. And nobody but my wife and I were probably watching the full hearings.
The same thing happened after the S&L crisis: Congress commissioned a study and grilled everybody in the industry, seeking to know what caused the crisis. I've said this before, but I'd just haul in a big mirror and hold it up in front of 'em.
************
I've said for the better part of a year now that the stock market has been ignoring what the bond market's been telling it. Today, the US stock market is ignoring what the rest of the world is telling it. Asia sold off to the tune of 8-9% overnight. Europe, about 5%, after the UK reported its first GDP contraction in 16 years. US stock futures were halted limit down in overnight trading. The Dow plunged nearly 500 points just after the opening bell.
Right now, it's off a mere 2.15%, and may just rally to a gain on the day.
But is the US market overdone? Hardly. A money manager from Blackrock was on Bubblevision this morning, saying, "The US economy just fell off a cliff in October."
Dude. GDP growth was negative in the fourth quarter of last year. It was only positive in the first quarter of this year due to an inventory build-up. It was only positive in the third due to a) the mailing of tax rebate checks, which were spent on gas, and b) strong exports thanks to a weak US dollar, a trade that has played itself out. This wasn't a sudden "fall off a cliff." It's been a slow, steady slide. You equity guys just never priced it in until now.
Well, next week we'll see third quarter GDP, and it'll be at least as weak as the UK's - maybe worse. Maybe then we'll see the gut-check that is due this market. Oversold? Methinks not, since the multiples don't yet reflect the coming slashed earnings guidance from US companies for 2009 and beyond. And actual earnings will likely miss guidance. (Misguidance - I made a funny!)
The Nikkei is down 56% from its peak, and Japan isn't even in recession yet. Trust me - we have further to fall.
Oh, and about Warren Buffett's recent exhortation to buy stocks, as he proclaimed he was doing? A real patriot, huh? And shouldn't we all throw our money behind an investor as savvy as the Oracle from Omaha?
Folks, understand this: no, Warren's not stupid. He's smart like a fox. And he recently took big stakes in Goldman Sachs and GE. Both of which are since on the bankruptcy bubble. Warren wants you to throw your money in, too, in hopes the momentum will prop the market up and salvage his big bets. In other words, he's joining Bush, Bernanke and Paulson in trying to jawbone stocks higher.
Don't drink the kool-aid.
************
My one-liner of the day: if ratings agencies rated wine, vinegar would be a 98.
************
I read a comment from a guy today who was talking about the priced-in likelihood that the Fed will cut the funds rate by half to three-quarters of a point next week. He said, "Their only option is to inflate our way out of this mess."
Tell me again how that works? I honestly don't know where they find these "experts."
************
I have a new idea for presidential debates. It comes from my undergrad days, when I majored in psychology.
Hook 'em up to an electric shock-delivering device. Every time they go beyond the time limit with an answer, or answer something other than the question that was posed, zap 'em.
Hard.
For every time they do it, increase the voltage.
Ultimate solution: electrocute all the politicians before they can get into office.
************
I leave you with this analogy, inspired by Dr. Greenspan, who referred to the credit crisis as a "tsunami."
It is indeed that. And Paulson, Bernanke, and Congress are standing on the beach, training huge, powerful fire-hoses at the coming mega-wave. They believe throwing all the water possible at the coming tsunami, they can turn it back.
Of course, they will be swamped. But by adding considerably to the water volume, they ensure that the wave will reach much further inland, and do much greater damage, than it otherwise would have.
Fed Chairman Ben Bernanke announced this week that the Fed will spend $600 billion to buy crap investments from money market mutual funds. This is outside of the $700 billion TARP.
On whose authority?
The Fed is broke - it's borrowing money in the markets, by having Treasury issue bonds, which they're doing at a gluttonous pace. So where will the money come from?
You know where.
The FDIC (which is also near-broke) already turned money market funds into bank accounts, by covering them with deposit insurance. Never mind the fact that money market funds aren't banks, which are the purview of the FDIC. And never mind the moral hazard of rewarding people who sought the higher yield of a money fund relative to a bank account, perfectly willing to live with the risk of placing their money uninsured.
Until, of course, they actually start losing it.
Banks are also the purview of the Fed. Not mutual funds. What's next, equity mutual funds? Hey, why not?
But what I really want to know is, where does Ben Bernanke get the authority to spend 600,000,000,000 taxpayer dollars? And why is no one outraged about this, besides me?
************
Meanwhile, on a related note, Hank Paulson has now announced that he'll use the TARP to buy into insurance companies too. What's next? This guy really does look like a buffoon these days - running around like a chicken with its head cut off. He has no earthly clue what he's doing, or what he'll do next. Might as well make some popcorn and just sit back and watch the show.
************
I was watching Bubblevision a few days ago, and Mark Haines was interviewing Mohamed El-Erian, the co-CEO of PIMCO, which is the largest bond-fund manager in the world. El-Erian is a smart dude, by the way. Haines asked him how the recent equity market carnage was going to impact the psyche of the average American.
El-Erian (I'm paraphrasing here): "Well, they're going to open their 401(k) statement, and they're going to decide to cut back, and consume less. And for the next five years or so, we're going to move to a more savings-based economy."
Haines (looking aghast): "If we move to a savings-based economy, what kind of economy do we have?"
A healthy one. The kind that, in 1982 when the savings rate was about 10%, spawned a nice, long, sustainable period of economic and stock market growth, with nary a bubble. Guys like Haines are part of the problem.
************
Did anyone else watch The Blame Game this week? You know, that entertaining game show on C-SPAN where our elected leaders waste more of our money by calling the "culprits" on the carpet and asking them inane questions, trying to obfuscate the fact that it is actually Congress itself that is to blame for most crises?
Now, I'm not saying that Alan "Mr. Bubble" Greenspan has no culpability in this mess, though his sin was not in opposing regulation so much as it was in encouraging speculative risk-taking by keeping money artificially cheap too long. The Godfather of Leverage should learn what a friend and I were discussing today at lunch: if you fill the ocean with chum, the sharks will feed. The sharks are doing nothing wrong in this instance; they are merely doing what sharks do. They do not need behavior-modifying regulation. They need their food source restricted. Stop dumping the chum, and they'll stop feeding on it.
And I'm not saying the SEC hasn't been asleep at the switch, nor the ratings agencies. I don't know why they picked on John Snow. For one thing, his successor bears far more guilt than he does, but of course Paulson, along with Bernanke, is the darling of our socialist government right now. So let's go after their predecessors. The other reason they shouldn't have picked on Snow is that, with a big smile on his face, he called them out, noting that he came before them pleading for curbs on Fannie and Freddie in 2003 and again in 2005, only to have them reject his pleas.
Rep. Frank Mica of Florida correctly pointed out that the blame lies with those who accepted sweetheart loans from Countrywide in favor of blocking regulation and pushing reckless lending, like Senate Banking Committee Chair Christopher Dodd did. Or those who took record amounts of money from Fannie Mae, like Senator Obama did. On that latter point, Mica complained that the final hearing on this matter isn't scheduled until November 20 - after the election.
But Committee Chairman Waxman called Mica's comments "political," and said that now is not the time to get political. Like all of this isn't political to begin with. Sadly, you won't see Mica's comments on the evening recaps. And nobody but my wife and I were probably watching the full hearings.
The same thing happened after the S&L crisis: Congress commissioned a study and grilled everybody in the industry, seeking to know what caused the crisis. I've said this before, but I'd just haul in a big mirror and hold it up in front of 'em.
************
I've said for the better part of a year now that the stock market has been ignoring what the bond market's been telling it. Today, the US stock market is ignoring what the rest of the world is telling it. Asia sold off to the tune of 8-9% overnight. Europe, about 5%, after the UK reported its first GDP contraction in 16 years. US stock futures were halted limit down in overnight trading. The Dow plunged nearly 500 points just after the opening bell.
Right now, it's off a mere 2.15%, and may just rally to a gain on the day.
But is the US market overdone? Hardly. A money manager from Blackrock was on Bubblevision this morning, saying, "The US economy just fell off a cliff in October."
Dude. GDP growth was negative in the fourth quarter of last year. It was only positive in the first quarter of this year due to an inventory build-up. It was only positive in the third due to a) the mailing of tax rebate checks, which were spent on gas, and b) strong exports thanks to a weak US dollar, a trade that has played itself out. This wasn't a sudden "fall off a cliff." It's been a slow, steady slide. You equity guys just never priced it in until now.
Well, next week we'll see third quarter GDP, and it'll be at least as weak as the UK's - maybe worse. Maybe then we'll see the gut-check that is due this market. Oversold? Methinks not, since the multiples don't yet reflect the coming slashed earnings guidance from US companies for 2009 and beyond. And actual earnings will likely miss guidance. (Misguidance - I made a funny!)
The Nikkei is down 56% from its peak, and Japan isn't even in recession yet. Trust me - we have further to fall.
Oh, and about Warren Buffett's recent exhortation to buy stocks, as he proclaimed he was doing? A real patriot, huh? And shouldn't we all throw our money behind an investor as savvy as the Oracle from Omaha?
Folks, understand this: no, Warren's not stupid. He's smart like a fox. And he recently took big stakes in Goldman Sachs and GE. Both of which are since on the bankruptcy bubble. Warren wants you to throw your money in, too, in hopes the momentum will prop the market up and salvage his big bets. In other words, he's joining Bush, Bernanke and Paulson in trying to jawbone stocks higher.
Don't drink the kool-aid.
************
My one-liner of the day: if ratings agencies rated wine, vinegar would be a 98.
************
I read a comment from a guy today who was talking about the priced-in likelihood that the Fed will cut the funds rate by half to three-quarters of a point next week. He said, "Their only option is to inflate our way out of this mess."
Tell me again how that works? I honestly don't know where they find these "experts."
************
I have a new idea for presidential debates. It comes from my undergrad days, when I majored in psychology.
Hook 'em up to an electric shock-delivering device. Every time they go beyond the time limit with an answer, or answer something other than the question that was posed, zap 'em.
Hard.
For every time they do it, increase the voltage.
Ultimate solution: electrocute all the politicians before they can get into office.
************
I leave you with this analogy, inspired by Dr. Greenspan, who referred to the credit crisis as a "tsunami."
It is indeed that. And Paulson, Bernanke, and Congress are standing on the beach, training huge, powerful fire-hoses at the coming mega-wave. They believe throwing all the water possible at the coming tsunami, they can turn it back.
Of course, they will be swamped. But by adding considerably to the water volume, they ensure that the wave will reach much further inland, and do much greater damage, than it otherwise would have.
Thursday, October 23, 2008
Support-Hosed
That's me. That's you. That's us.
Why is the US government - under a Republican administration, no less - throwing so many resources at trying to prop up markets?
President Bush speaks Monday before the market opens. Coincidence? Bernanke speaks later in the day. Paulson's up on Tuesday.
Aren't stock investors supposed to be at risk of losing money?
Same with houses. What goes up too much, must come down. And yet plans still abound to bail out irresponsible people who bought more house than they could afford on terms they couldn't repay. (Yes, yes, along with the poor few who were pushed by realtors and duped by lenders, but trust me, they're the minority. Just as there are no atheists in a foxhole, everyone's a victim in a crisis, especially when the handouts start flowing.)
Yet fresh plans abound to bail out homeowners. Why? "We've got to stop home prices from falling further!" Am I the only one who recognizes the lunacy in that? "We've got to stop rocks from falling after we throw them in the air! We've got to stop fires from burning our forests!" Some things, you can't stop.
Nor should you. If home prices have risen too much, they need to correct. Why? Because if you prop them up, the ultimate correction will be even more painful.
Want a parallel? We had a nice, sustainable long-term growth trend going in stocks in the '80s and early '90s. Then, things got bubble. Alan Greenspan warned of "irrational exuberance."
Then he lost all rationality. He made money dirt-cheap in the middle of that irrational exuberance. Why?
Because a big hedge fund was about to fail. One fund. But the hue and cry from big institutional investors - many of them foreign banks - pressured Mr. Bubble to save the day. So he did. And thereby spawned the dot-com bubble.
That bubble burst in 2000. Mr. Bubble then kept interest rates too low, too long, inflating another asset bubble. Stocks never had a chance to fully retreat to their long-term sustainable growth trend, so we propped 'em up again. Happy times. The Dow hit a new record high of over 14,000 last October.
As Oliver Hardy used to say to Stanley Laurel, "Now look what you've done!"
So they want to do it again. Unbelievable. Those who fail to learn from their past mistakes are doomed to repeat them, as Santayana said.
As for housing, the latest goofy plan comes from FDIC Chair Sheila Bair. Acknowledging that Paulson's Homeowner Hope plan, hatched in July, was "too little, too late," she wants to hatch another one.
Did anybody else get the irony in that? If the plan in July was "too late," isn't it even later now? Or is my calendar off? Do you have to wind calendars for them to work? I'm a bit confounded.
Her plan is based on the "success" the FDIC has had in re-structuring delinquent mortgages on the books of its recent acquisition, IndyMac. Let's examine that success.
Since taking over IndyMac - also in July - the feds have examined its books and found that 60,000 of its mortgages are at least 60 days past due.
That's 60,000 loans, people - at one institution. Just one.
They also found that two-thirds of them qualify for Bair's re-structuring experiment. That's 40,000 loans, unless my calculator's on the fritz along with my calendar.
As an aside, though, that's 20,000 that can't be restructured - at one institution. Just one.
So 40,000 loans can be worked out. So the feds have send more than 15,000 loan modification notices out, and have called "thousands more," offering better terms. And how many of those borrowers have hit the bid?
Three thousand five hundred.
Let's recap this model of success: since July, the FDIC has mailed more than 15,000 letters (you and I bought the stamps, by the way) to deadbeat borrowers. (Again, yes, some of them truly fell on hard times. But the majority just bought more house than they could afford, on terms they couldn't repay, and/or didn't have any savings in the event they lost their job, and/or had too much credit card and auto loan debt, and/or simply didn't want to meet their mortgage obligation anymore if the value of their house wasn't going up by double digits every year.)
But I digress. They mailed these letters, and made "thousands" more phone calls, which should have gotten them to at least half the eligible borrowers. Of that, they've managed to restructure about 17% of those they've communicated with. Or about 5% of the total.
At one institution.
Meanwhile, mortgage foreclosures in the third quarter shot up 71% year-over-year in the third quarter.
So tell me again how efficiently the feds are going to be able to replicate this smashing success nationwide - especially when they've already been trying for the same span of time Ms. Bair's had the keys to IndyMac?
By the end of this year, banks will own a third of all US real estate for sale. REO sales are the only sales taking place these days, because the prices are at bargain-basement levels. That's driving down the price of every home in every neighborhood where there's a bank-owned home for sale. Do you think that additional growth of REO won't drive home prices down more? And do you think bank failures won't continue to mount as the real estate losses tally up?
Of course they will, on both counts. And it's the natural order of things when we've built more homes than people need, and leveraged the system to the hilt, top to bottom.
But they want to prop prices up, on both houses and stocks.
I don't want to be here when the next bubble bursts. No economy can withstand three huge back-to-back asset bubbles in such a short span of time. And I don't want to witness the collapse.
Thankfully, I won't have to. They will fail. Washington can no more stop this thing than you or I could stop a runaway train by standing in front of it.
But they can sure make it worse.
Why is the US government - under a Republican administration, no less - throwing so many resources at trying to prop up markets?
President Bush speaks Monday before the market opens. Coincidence? Bernanke speaks later in the day. Paulson's up on Tuesday.
Aren't stock investors supposed to be at risk of losing money?
Same with houses. What goes up too much, must come down. And yet plans still abound to bail out irresponsible people who bought more house than they could afford on terms they couldn't repay. (Yes, yes, along with the poor few who were pushed by realtors and duped by lenders, but trust me, they're the minority. Just as there are no atheists in a foxhole, everyone's a victim in a crisis, especially when the handouts start flowing.)
Yet fresh plans abound to bail out homeowners. Why? "We've got to stop home prices from falling further!" Am I the only one who recognizes the lunacy in that? "We've got to stop rocks from falling after we throw them in the air! We've got to stop fires from burning our forests!" Some things, you can't stop.
Nor should you. If home prices have risen too much, they need to correct. Why? Because if you prop them up, the ultimate correction will be even more painful.
Want a parallel? We had a nice, sustainable long-term growth trend going in stocks in the '80s and early '90s. Then, things got bubble. Alan Greenspan warned of "irrational exuberance."
Then he lost all rationality. He made money dirt-cheap in the middle of that irrational exuberance. Why?
Because a big hedge fund was about to fail. One fund. But the hue and cry from big institutional investors - many of them foreign banks - pressured Mr. Bubble to save the day. So he did. And thereby spawned the dot-com bubble.
That bubble burst in 2000. Mr. Bubble then kept interest rates too low, too long, inflating another asset bubble. Stocks never had a chance to fully retreat to their long-term sustainable growth trend, so we propped 'em up again. Happy times. The Dow hit a new record high of over 14,000 last October.
As Oliver Hardy used to say to Stanley Laurel, "Now look what you've done!"
So they want to do it again. Unbelievable. Those who fail to learn from their past mistakes are doomed to repeat them, as Santayana said.
As for housing, the latest goofy plan comes from FDIC Chair Sheila Bair. Acknowledging that Paulson's Homeowner Hope plan, hatched in July, was "too little, too late," she wants to hatch another one.
Did anybody else get the irony in that? If the plan in July was "too late," isn't it even later now? Or is my calendar off? Do you have to wind calendars for them to work? I'm a bit confounded.
Her plan is based on the "success" the FDIC has had in re-structuring delinquent mortgages on the books of its recent acquisition, IndyMac. Let's examine that success.
Since taking over IndyMac - also in July - the feds have examined its books and found that 60,000 of its mortgages are at least 60 days past due.
That's 60,000 loans, people - at one institution. Just one.
They also found that two-thirds of them qualify for Bair's re-structuring experiment. That's 40,000 loans, unless my calculator's on the fritz along with my calendar.
As an aside, though, that's 20,000 that can't be restructured - at one institution. Just one.
So 40,000 loans can be worked out. So the feds have send more than 15,000 loan modification notices out, and have called "thousands more," offering better terms. And how many of those borrowers have hit the bid?
Three thousand five hundred.
Let's recap this model of success: since July, the FDIC has mailed more than 15,000 letters (you and I bought the stamps, by the way) to deadbeat borrowers. (Again, yes, some of them truly fell on hard times. But the majority just bought more house than they could afford, on terms they couldn't repay, and/or didn't have any savings in the event they lost their job, and/or had too much credit card and auto loan debt, and/or simply didn't want to meet their mortgage obligation anymore if the value of their house wasn't going up by double digits every year.)
But I digress. They mailed these letters, and made "thousands" more phone calls, which should have gotten them to at least half the eligible borrowers. Of that, they've managed to restructure about 17% of those they've communicated with. Or about 5% of the total.
At one institution.
Meanwhile, mortgage foreclosures in the third quarter shot up 71% year-over-year in the third quarter.
So tell me again how efficiently the feds are going to be able to replicate this smashing success nationwide - especially when they've already been trying for the same span of time Ms. Bair's had the keys to IndyMac?
By the end of this year, banks will own a third of all US real estate for sale. REO sales are the only sales taking place these days, because the prices are at bargain-basement levels. That's driving down the price of every home in every neighborhood where there's a bank-owned home for sale. Do you think that additional growth of REO won't drive home prices down more? And do you think bank failures won't continue to mount as the real estate losses tally up?
Of course they will, on both counts. And it's the natural order of things when we've built more homes than people need, and leveraged the system to the hilt, top to bottom.
But they want to prop prices up, on both houses and stocks.
I don't want to be here when the next bubble bursts. No economy can withstand three huge back-to-back asset bubbles in such a short span of time. And I don't want to witness the collapse.
Thankfully, I won't have to. They will fail. Washington can no more stop this thing than you or I could stop a runaway train by standing in front of it.
But they can sure make it worse.
Wednesday, October 22, 2008
The Truth About the Truth
Where do you get your news? CNN? MSNBC? CNBC? FoxNews? The major networks?
There's a problem if you answered "yes" to any of the above. Of course, we all know what the problem is. MSNBC might as well be called "The Obama Channel," and Fox could be called "The McCain Channel." CNN and the networks fall closer to the MSNBC side of the aisle. The point is, they're all biased.
Watch them all, like I do, and you wind up with the distortions, half-truths and outright lies of both sides, but still no facts. It's entertaining, but not very informative.
Let's talk specifically about the fail-out, as I now like to call it.
If you watched those outlets listed above, you thought it was bound to pass. Paulson, Pelosi, Dodd, Frank, and their ilk made sure they got all the face time with the press, and the media basically ignored the opponents, who were seen as being on the fringe.
Early on, nobody was talking about the ten-to-one constituent opposition to the bailout. They just buried it. (I found out from a Wall Street dealer e-mail that went out to client firms.)
If you wanted to know what was really being said, you could tune in to C-SPAN at ten o'clock at night, when a brave few stalwart lawmakers were fighting the good fight in a near-empty chamber.
But most of us won't watch C-SPAN. We don't want the full context, live, we want the sound bites, spun. So we tune into CNBC or Fox or MSNBC and they tell us what they want us to believe.
I'm going to single out CNBC now, because they report market news, and because I have the most experience with them.
For one thing, I watch them throughout the day, because, like most brokerage firms, my firm has a live CNBC satellite feed to our trading desk.
For another, I know how they get their "experts" and "panelists."
When you see that trader from UBS talking about stocks, or that analyst from Citigroup talking about futures, you might be wondering, "How does a guy like that get picked from among the thousands of traders and analysts out there? Wow - he must be really smart."
I'll tell you how he gets picked: advertising dollars.
UBS and Citi are big advertisers on CNBC. But I'll get back to that later. First, I need to provide proof for my bold claim.
I have personally been invited to appear on several CNBC shows, including Larry Kudlow's. (As an aside, did you know that Larry used to be Bear Stearns' chief economist back in the late '80s and early '90s? Then he started missing meetings with important Bear clients. Turned out he had a nasty little coke habit. Just thought you'd want to "bear" that in mind.)
When I got the first call inviting me on, I was flattered. I could barely contain my enthusiasm when I said, "Sure!"
"Great," I was told. "The minimum package is $15,000, and for that you get ..." Now, this was $15,000 back in about 1999 or so, when I got my first invite. I can only imagine what the price tag is now - I don't know, because I no longer take their calls. I know the drill.
Okay, so why wouldn't I spend the money for that opportunity for my business? And why does UBS?
Simple. My clients generally don't watch CNBC, and my firm doesn't profit from the market conditions that a UBS profits from.
Generally speaking, investment firms make money when people are investing. Remember the dot-com bubble? The day-trading how-to's? Everybody and his brother tuned into CNBC. But during a bear market, we watch other stuff - something that'll cheer us up.
And banks make money when people and companies are borrowing. During a recession, that's not happening.
That's why bank and Wall Street economists are always over-optimistic. And that's why CNBC commentators like the marginally attractive but sadly vapid Erin Burnett look for the silver lining in every cloud.
Oh, a big name can get on CNBC for free. Alan Greenspan, Warren Buffett, Jim Rogers, Mark Cuban - those people are courted constantly by CNBC. But to pick an analyst or a trader to provide today's infomercial - er, insights - they contact investment firms, offer their package, and get a list of names, corresponding to the market or area of the economy in which those individuals have expertise. And they offer them air-time based on the ante.
So now you know how it works. Free speech meets free enterprise. As Russian comic Yakov Smirnoff says, "America - what a country!"
There's a problem if you answered "yes" to any of the above. Of course, we all know what the problem is. MSNBC might as well be called "The Obama Channel," and Fox could be called "The McCain Channel." CNN and the networks fall closer to the MSNBC side of the aisle. The point is, they're all biased.
Watch them all, like I do, and you wind up with the distortions, half-truths and outright lies of both sides, but still no facts. It's entertaining, but not very informative.
Let's talk specifically about the fail-out, as I now like to call it.
If you watched those outlets listed above, you thought it was bound to pass. Paulson, Pelosi, Dodd, Frank, and their ilk made sure they got all the face time with the press, and the media basically ignored the opponents, who were seen as being on the fringe.
Early on, nobody was talking about the ten-to-one constituent opposition to the bailout. They just buried it. (I found out from a Wall Street dealer e-mail that went out to client firms.)
If you wanted to know what was really being said, you could tune in to C-SPAN at ten o'clock at night, when a brave few stalwart lawmakers were fighting the good fight in a near-empty chamber.
But most of us won't watch C-SPAN. We don't want the full context, live, we want the sound bites, spun. So we tune into CNBC or Fox or MSNBC and they tell us what they want us to believe.
I'm going to single out CNBC now, because they report market news, and because I have the most experience with them.
For one thing, I watch them throughout the day, because, like most brokerage firms, my firm has a live CNBC satellite feed to our trading desk.
For another, I know how they get their "experts" and "panelists."
When you see that trader from UBS talking about stocks, or that analyst from Citigroup talking about futures, you might be wondering, "How does a guy like that get picked from among the thousands of traders and analysts out there? Wow - he must be really smart."
I'll tell you how he gets picked: advertising dollars.
UBS and Citi are big advertisers on CNBC. But I'll get back to that later. First, I need to provide proof for my bold claim.
I have personally been invited to appear on several CNBC shows, including Larry Kudlow's. (As an aside, did you know that Larry used to be Bear Stearns' chief economist back in the late '80s and early '90s? Then he started missing meetings with important Bear clients. Turned out he had a nasty little coke habit. Just thought you'd want to "bear" that in mind.)
When I got the first call inviting me on, I was flattered. I could barely contain my enthusiasm when I said, "Sure!"
"Great," I was told. "The minimum package is $15,000, and for that you get ..." Now, this was $15,000 back in about 1999 or so, when I got my first invite. I can only imagine what the price tag is now - I don't know, because I no longer take their calls. I know the drill.
Okay, so why wouldn't I spend the money for that opportunity for my business? And why does UBS?
Simple. My clients generally don't watch CNBC, and my firm doesn't profit from the market conditions that a UBS profits from.
Generally speaking, investment firms make money when people are investing. Remember the dot-com bubble? The day-trading how-to's? Everybody and his brother tuned into CNBC. But during a bear market, we watch other stuff - something that'll cheer us up.
And banks make money when people and companies are borrowing. During a recession, that's not happening.
That's why bank and Wall Street economists are always over-optimistic. And that's why CNBC commentators like the marginally attractive but sadly vapid Erin Burnett look for the silver lining in every cloud.
Oh, a big name can get on CNBC for free. Alan Greenspan, Warren Buffett, Jim Rogers, Mark Cuban - those people are courted constantly by CNBC. But to pick an analyst or a trader to provide today's infomercial - er, insights - they contact investment firms, offer their package, and get a list of names, corresponding to the market or area of the economy in which those individuals have expertise. And they offer them air-time based on the ante.
So now you know how it works. Free speech meets free enterprise. As Russian comic Yakov Smirnoff says, "America - what a country!"
The Scarlet Letter
I wrote my Representative and Senators before the votes on the bailout. My Senators both voted against it, but my Representative voted for it.
He sent me an e-mail reply today, explaining why he voted for it with the standard "sure the people don't like it, but we're smarter than the people and had to save them from themselves" gambit.
He should wear that letter like a badge of shame.
He even cited the fact that Warren Buffett was for it, which was purely self-serving on Buffett's part, just like his recent attempt to jawbone the stock market higher after he bought into GE and Goldman. He quoted Buffett as saying he'd rather be "approximately right" than "precisely wrong," saying that to do nothing would have been "precisely wrong."
And, incredibly, he tried to explain derivatives to me - me, a guy who cut his teeth evaluating risk-controlled arbitrage strategies by thrifts, traded futures, and valued and managed mortgage and interest rate derivatives including captions, swaptions, and residuals.
So, in case anyone's interested, here's my response to him:
"Dear Congressman Moore,
I appreciate your response. However, I fear that in this instance, both you and Mr. Buffett - who, as a professional investor, stands to profit mightily from the stance he's taking, regarding the bailout and his euphoric urging of Americans to buy stocks - are both precisely wrong. (Regarding the stock market, I believe today provided ample evidence of that.)
I am an economist who has been accurately forecasting the current economic crisis for at least 18 months now, and foresaw the perils of excess government intervention in the markets as early as 2001, after the Greenspan-inflated dot-com bubble burst. I have also actively traded and managed many of the complex derivatives you attempt to explain. As such, I am all too aware of the causes for this crisis, which has roots as far back as the New Deal. In fact, most of the causes are legislative in nature - DIDMCA, the Tax Reform Act of 1986, etc. I do not accept your partisan view of the causal factors - your Democratic colleagues, notably Messrs. Frank, Dodd and Schumer, are at least equally complicit in the current state of the US economy. Rep. Frank, in particular, stated in 2004: "I'm willing to roll the dice when it comes to subsidized housing." Given that he - and you - are standing at the craps table with taxpayer money, that attitude is dereliction of duty bordering on the criminal.
Now is not a time for partisan finger-pointing, it is a time for realistic solutions, which you and your colleagues have failed yet again to provide. Rest assured that you will never have my vote as long as I live, because I and my fellow taxpayers will be paying for your reckless, uninformed and irresponsible decision-making for at least that long.
Sincerely,
Brian Hague"
He sent me an e-mail reply today, explaining why he voted for it with the standard "sure the people don't like it, but we're smarter than the people and had to save them from themselves" gambit.
He should wear that letter like a badge of shame.
He even cited the fact that Warren Buffett was for it, which was purely self-serving on Buffett's part, just like his recent attempt to jawbone the stock market higher after he bought into GE and Goldman. He quoted Buffett as saying he'd rather be "approximately right" than "precisely wrong," saying that to do nothing would have been "precisely wrong."
And, incredibly, he tried to explain derivatives to me - me, a guy who cut his teeth evaluating risk-controlled arbitrage strategies by thrifts, traded futures, and valued and managed mortgage and interest rate derivatives including captions, swaptions, and residuals.
So, in case anyone's interested, here's my response to him:
"Dear Congressman Moore,
I appreciate your response. However, I fear that in this instance, both you and Mr. Buffett - who, as a professional investor, stands to profit mightily from the stance he's taking, regarding the bailout and his euphoric urging of Americans to buy stocks - are both precisely wrong. (Regarding the stock market, I believe today provided ample evidence of that.)
I am an economist who has been accurately forecasting the current economic crisis for at least 18 months now, and foresaw the perils of excess government intervention in the markets as early as 2001, after the Greenspan-inflated dot-com bubble burst. I have also actively traded and managed many of the complex derivatives you attempt to explain. As such, I am all too aware of the causes for this crisis, which has roots as far back as the New Deal. In fact, most of the causes are legislative in nature - DIDMCA, the Tax Reform Act of 1986, etc. I do not accept your partisan view of the causal factors - your Democratic colleagues, notably Messrs. Frank, Dodd and Schumer, are at least equally complicit in the current state of the US economy. Rep. Frank, in particular, stated in 2004: "I'm willing to roll the dice when it comes to subsidized housing." Given that he - and you - are standing at the craps table with taxpayer money, that attitude is dereliction of duty bordering on the criminal.
Now is not a time for partisan finger-pointing, it is a time for realistic solutions, which you and your colleagues have failed yet again to provide. Rest assured that you will never have my vote as long as I live, because I and my fellow taxpayers will be paying for your reckless, uninformed and irresponsible decision-making for at least that long.
Sincerely,
Brian Hague"
Thursday, October 16, 2008
Dumb and Dumber
And dumbest.
Dumb: Sen. McCain's economic plan, which is two-pronged.
Prong one: Let people who are 59 or older withdraw from their retirement accounts at a tax rate of 10%, instead of their current tax rate.
Okay, the dis-savings attribute of this is less severe than his rival's plan, and I get the age component: help out those people who are near retirement age, and let them bail in the face of a bear market.
But for one thing, they can "bail" without withdrawing: just rebalance the portfolio. Buy inverse index funds, or bond funds, or bank CDs, or just put it in a money market fund, for crying out loud.
And for another, why tax them at all? Just reduce the withdrawal age to 59, at least temporarily. Lots of people retire in their 50s now anyway. And if you're trying help someone get money out before the market tanks further, why add a 10% hickey on the hit they've already taken?
Prong two: cut the capital gains tax. Hey, I'm all for that, and I understand the increased-investment-stimulates-the-economy logic. But, ah, Senator - not too many portfolios are sporting capital gains these days. Great idea, bad timing, little immediate benefit. I thought your plan was to fix the economy, now?
Dumber: Sen. Obama's plan, also two-pronged.
Prong one: already covered it, yesterday. Worse than McCain's idea.
Prong two: provide a $3,000 tax credit for every job a business creates.
Let's see, average hourly earnings in this country are about $18 (for now). Multiply that by the typical full-time schedule of about 2,000 hours a year, and you're paying $36k. Plus bennies and overhead at about 15% on top of that, plus hiring costs. So all-in, first year, this new position costs you upwards of $45k.
And you want to entice me to add this expense to my business by offering a tax credit worth about 7% of the cost.
Senator, if I need more employees, I'll hire them. If the revenue I can generate with another warm body justifies the expense, you can be assured I'll create a job.
But your generous offer is one of those trades that's hard to make up on volume.
Dumbest? The stock market.
No, I'm not just bitter because I'm short, and had a red-letter day yesterday, and looked set for another one tomorrow, only to give up half of yesterday's gains.
Here was the data slate that hit the market today:
Inflation: the headline reading was down, and the core reading was flat. Neutral signal, basically.
Jobless claims: initial claims were down more than expected, on workers temporarily sidelined by Gustav going back to work. But continuing claims were up unexpectedly, to a new cyclical high. And that's worse because that means once a worker loses his job, he has trouble finding a replacement job. So he's chronically unemployed. Bad news.
Net foreign purchases of US securities: who really cares, for the most part? Not a market-mover.
Industrial Production: the biggest drop since 1974. Ouch. A real recession signal in the year-over-year number. Bad news.
Capacity utilization: down two and a half points, twice as big a drop as forecast, and the first reading below the traditional recession threshold of 78% since the last recession. Bad news.
Philly Fed index: huge drop. It fell three times as much as forecast. Another bad sign for manufacturing.
That was the morning's slate. Also, Citi and Merrill reported yet another quarter of losses, on even more bad bond write-downs.
The market wanted to rally. It tried early on, focusing solely on the inflation number, ignoring that even though the core reading was flat, it's still a half-point above the Fed's comfort zone, and the fact that core producer prices were up for the month, higher core consumer prices are coming, so this is temporary relief at best.
Besides, who gives two hoots about inflation right now? Not Ben Bernanke, I can promise you.
So in the first hour of trading, the Dow was up more than 100 points.
Then reality set in.
The stark reality that, even if the inflation number was spun as a positive, the overwhelming bad news that the manufacturing sector - supported all year by exports, and the last bastion of hope for the US economy - is falling completely out of bed (you heard it here first, by the way), caused a free-fall. by mid-morning, the Dow was down almost 400 points, to 8,200.
Then, it rallied back. We even got another piece of bad news, ugly-bad, at 1:00 EDT, when the National Association of Home Builders reported their builder sentiment index had fallen to a new record low.
Yes, housing's still in the toilet. And getting worse all the time. And what's even worse is the strong correlation (which I've mentioned before) between the NAHB index and the S&P 500 lagged 18 months. So if this new low represents the bottom, that means the bottom for stocks is about another 18 months out.
All these guys looking at every big down day keep talking about whether we're nearing a bottom. This isn't going to happen quick. It's going to look more like the Bataan Death March, with Paulson and Bernanke poking us with their bayonets at every step.
Still, the Dow came storming back to neutral on the day. And it bounced around there from late morning until within about an hour of the close, staying within a range of about 100 points either side of yesterday's close.
And that was telling. Why, you ask?
Because yesterday's close was uncomfortably close to Friday's, which was the low for this bear market to date. And this market wants desperately to avoid setting another low this quickly. Desperately. And a drop of about 125 points would have gotten it there.
So, it took off in the last hour of trading, posting a euphoric, 400-point gain in the face of a slew of bad economic data.
And in the face of all reason and logic.
But I'm not worried. Monday's gain - aided by the closing of the bond market and the banks - was similarly euphoric. And in two days, it pretty much evaporated.
This one won't take any longer, I'll bet. Oh, we may get a Friday rally, since the market loves to end the week positive.
But we may also get a new low. Reality may set in with today's data. Add in the fact that the next shoe to drop - hedge funds - was a hot topic of discussion today, as was the fact that November's ARM resets are going to produce huge jumps in payments due to the spike in LIBOR over the past month, and you have a perfect recipe for panic.
But only if you're logical. The stock market is not.
Tomorrow will also bring the monthly housing starts and building permits numbers. They're already at 17-year lows. You think they'll be up? And the first look at consumer confidence for October. Where do you think that'll come in: higher, or lower?
Today's late rally was attributed to four different causes that I saw. First, the inflation data wasn't as bad as expected - a "hey, at least it didn't go up" reaction. I already debunked that one.
Second, Citi's loss wasn't as bad as expected. Okay. But it was still a loss. And Merrill's was worse than expected.
Third, Yahoo rallied when a Microsoft exec made an off-the-cuff comment that a deal could still happen. Well, Yahoo's CEO didn't say he welcomed it. So it's not likely.
Finally, as stocks sold off, oil dipped below $70 a barrel. Okay, that one could be legit.
But it's around $72 right now.
So, take three false-hope signals, add in a fourth signal that has since reversed direction, and stack it up against five really bad signs. Add in further bank write-downs. Toss in the imminent collapse of half the world's hedge funds, triggering massive sales of securities, driving prices down further. Sprinkle on the specter of a fresh tsunami of foreclosures after ARM payments go up 10-13% in November.
Then throw in what happens in Asian and European markets overnight. I don't think they'll be as irrationally exuberant as ours, to steal a phrase from Mr. Bubble.
Top it all off with the special sauce of a couple more pieces of bad economic news tomorrow.
And the smart money is on a big sell-off.
Oh, it'll be a volatile day, too. Get this: since the beginning of September, 27 of the 33 trading days have seen triple-digit moves in the Dow. The average change (on an absolute value basis)?
295 points. Take out those six double-digit days, and it's well over 300.
So if you're worried about your 401(k), or your job, take heart. It could be worse.
You could be a stock trader.
(Sorry if you are.)
Dumb: Sen. McCain's economic plan, which is two-pronged.
Prong one: Let people who are 59 or older withdraw from their retirement accounts at a tax rate of 10%, instead of their current tax rate.
Okay, the dis-savings attribute of this is less severe than his rival's plan, and I get the age component: help out those people who are near retirement age, and let them bail in the face of a bear market.
But for one thing, they can "bail" without withdrawing: just rebalance the portfolio. Buy inverse index funds, or bond funds, or bank CDs, or just put it in a money market fund, for crying out loud.
And for another, why tax them at all? Just reduce the withdrawal age to 59, at least temporarily. Lots of people retire in their 50s now anyway. And if you're trying help someone get money out before the market tanks further, why add a 10% hickey on the hit they've already taken?
Prong two: cut the capital gains tax. Hey, I'm all for that, and I understand the increased-investment-stimulates-the-economy logic. But, ah, Senator - not too many portfolios are sporting capital gains these days. Great idea, bad timing, little immediate benefit. I thought your plan was to fix the economy, now?
Dumber: Sen. Obama's plan, also two-pronged.
Prong one: already covered it, yesterday. Worse than McCain's idea.
Prong two: provide a $3,000 tax credit for every job a business creates.
Let's see, average hourly earnings in this country are about $18 (for now). Multiply that by the typical full-time schedule of about 2,000 hours a year, and you're paying $36k. Plus bennies and overhead at about 15% on top of that, plus hiring costs. So all-in, first year, this new position costs you upwards of $45k.
And you want to entice me to add this expense to my business by offering a tax credit worth about 7% of the cost.
Senator, if I need more employees, I'll hire them. If the revenue I can generate with another warm body justifies the expense, you can be assured I'll create a job.
But your generous offer is one of those trades that's hard to make up on volume.
Dumbest? The stock market.
No, I'm not just bitter because I'm short, and had a red-letter day yesterday, and looked set for another one tomorrow, only to give up half of yesterday's gains.
Here was the data slate that hit the market today:
Inflation: the headline reading was down, and the core reading was flat. Neutral signal, basically.
Jobless claims: initial claims were down more than expected, on workers temporarily sidelined by Gustav going back to work. But continuing claims were up unexpectedly, to a new cyclical high. And that's worse because that means once a worker loses his job, he has trouble finding a replacement job. So he's chronically unemployed. Bad news.
Net foreign purchases of US securities: who really cares, for the most part? Not a market-mover.
Industrial Production: the biggest drop since 1974. Ouch. A real recession signal in the year-over-year number. Bad news.
Capacity utilization: down two and a half points, twice as big a drop as forecast, and the first reading below the traditional recession threshold of 78% since the last recession. Bad news.
Philly Fed index: huge drop. It fell three times as much as forecast. Another bad sign for manufacturing.
That was the morning's slate. Also, Citi and Merrill reported yet another quarter of losses, on even more bad bond write-downs.
The market wanted to rally. It tried early on, focusing solely on the inflation number, ignoring that even though the core reading was flat, it's still a half-point above the Fed's comfort zone, and the fact that core producer prices were up for the month, higher core consumer prices are coming, so this is temporary relief at best.
Besides, who gives two hoots about inflation right now? Not Ben Bernanke, I can promise you.
So in the first hour of trading, the Dow was up more than 100 points.
Then reality set in.
The stark reality that, even if the inflation number was spun as a positive, the overwhelming bad news that the manufacturing sector - supported all year by exports, and the last bastion of hope for the US economy - is falling completely out of bed (you heard it here first, by the way), caused a free-fall. by mid-morning, the Dow was down almost 400 points, to 8,200.
Then, it rallied back. We even got another piece of bad news, ugly-bad, at 1:00 EDT, when the National Association of Home Builders reported their builder sentiment index had fallen to a new record low.
Yes, housing's still in the toilet. And getting worse all the time. And what's even worse is the strong correlation (which I've mentioned before) between the NAHB index and the S&P 500 lagged 18 months. So if this new low represents the bottom, that means the bottom for stocks is about another 18 months out.
All these guys looking at every big down day keep talking about whether we're nearing a bottom. This isn't going to happen quick. It's going to look more like the Bataan Death March, with Paulson and Bernanke poking us with their bayonets at every step.
Still, the Dow came storming back to neutral on the day. And it bounced around there from late morning until within about an hour of the close, staying within a range of about 100 points either side of yesterday's close.
And that was telling. Why, you ask?
Because yesterday's close was uncomfortably close to Friday's, which was the low for this bear market to date. And this market wants desperately to avoid setting another low this quickly. Desperately. And a drop of about 125 points would have gotten it there.
So, it took off in the last hour of trading, posting a euphoric, 400-point gain in the face of a slew of bad economic data.
And in the face of all reason and logic.
But I'm not worried. Monday's gain - aided by the closing of the bond market and the banks - was similarly euphoric. And in two days, it pretty much evaporated.
This one won't take any longer, I'll bet. Oh, we may get a Friday rally, since the market loves to end the week positive.
But we may also get a new low. Reality may set in with today's data. Add in the fact that the next shoe to drop - hedge funds - was a hot topic of discussion today, as was the fact that November's ARM resets are going to produce huge jumps in payments due to the spike in LIBOR over the past month, and you have a perfect recipe for panic.
But only if you're logical. The stock market is not.
Tomorrow will also bring the monthly housing starts and building permits numbers. They're already at 17-year lows. You think they'll be up? And the first look at consumer confidence for October. Where do you think that'll come in: higher, or lower?
Today's late rally was attributed to four different causes that I saw. First, the inflation data wasn't as bad as expected - a "hey, at least it didn't go up" reaction. I already debunked that one.
Second, Citi's loss wasn't as bad as expected. Okay. But it was still a loss. And Merrill's was worse than expected.
Third, Yahoo rallied when a Microsoft exec made an off-the-cuff comment that a deal could still happen. Well, Yahoo's CEO didn't say he welcomed it. So it's not likely.
Finally, as stocks sold off, oil dipped below $70 a barrel. Okay, that one could be legit.
But it's around $72 right now.
So, take three false-hope signals, add in a fourth signal that has since reversed direction, and stack it up against five really bad signs. Add in further bank write-downs. Toss in the imminent collapse of half the world's hedge funds, triggering massive sales of securities, driving prices down further. Sprinkle on the specter of a fresh tsunami of foreclosures after ARM payments go up 10-13% in November.
Then throw in what happens in Asian and European markets overnight. I don't think they'll be as irrationally exuberant as ours, to steal a phrase from Mr. Bubble.
Top it all off with the special sauce of a couple more pieces of bad economic news tomorrow.
And the smart money is on a big sell-off.
Oh, it'll be a volatile day, too. Get this: since the beginning of September, 27 of the 33 trading days have seen triple-digit moves in the Dow. The average change (on an absolute value basis)?
295 points. Take out those six double-digit days, and it's well over 300.
So if you're worried about your 401(k), or your job, take heart. It could be worse.
You could be a stock trader.
(Sorry if you are.)
Tuesday, October 14, 2008
The Natural Course of Things
Once again, credit my lovely wife for her wisdom.
During last spring's heavy flooding in Iowa and Missouri, we were watching news coverage of residents of river towns frantically putting up sandbags. My wife made the following observation (I'm paraphrasing):
"It's fine, and understandable, that they're doing that. But the river has pretty much gone where it's wanted to go for centuries, and there's really nothing man can do to stop that."
Somebody please tell Hank Paulson and Ben Bernanke. Quick. Before we all drown in a river of debt.
They started out by pretty much ignoring the rising waters.
On July 19 of last year - two days after the Bear Stearns hedge fund collapse - Bernanke told the Senate Banking Committee that losses from the subprime fiasco might total as much as $100 billion.
Today's estimates? According to the IMF, $1.4 trillion. (To be fair, not all of that is directly from subprime. But whether the flooding comes entirely from rainfall directly on the river itself, or whether some of it comes from various tributaries that are also affected by the rain, the guy watching the water level should see the flood coming.)
It's also interesting that less than a month after Bernanke made that bold estimate, his Fed began cutting interest rates, "acknowledging for the first time that an extraordinary policy shift is needed to contain the subprime-mortgage collapse," according to Bloomberg.
So after ignoring the rising waters, Bernanke and Paulson began casually tossing a sandbag here, another there, thinking the raging waters would be "contained." Now, they're throwing everything they've got at it. Come to think of it, since the US is broke and the Fed is insolvent, they're throwing stuff they don't have at it. In the form of money. Mountains of money.
Our money.
But this thing is looking less like a flooded river, and more like one great big honkin' mother of a tsunami.
And by throwing money at it, they're not really throwing sandbags. They're throwing great big buckets of ... water.
See, the river will seek its natural course, and its natural level. As I laid out yesterday, so will markets, whether they be for stocks, real estate, jobs, dollars ... whatever.
And men trying to stop that from happening is as futile as men trying to alter the course of the Mississippi.
Especially when the men are incompetent.
************
Let's get back to that IMF estimate of total losses, because it lies at the heart of part one of the two-part reason Paulson's ever-shifting TARP plan will fail.
Total US bank losses to date have been about $385 billion (for the world, it's $637 billion, or just less than half the IMF forecast). US financials have raised just $338 billion in capital to offset the losses. Now, that doesn't sound too bad - they've raised 88% of what they've lost, so they're only down $50 billion or so.
But they've raised $177 billion of that capital - more than half the total raised - in the third and fourth quarters of this year. And that includes the first round of TARP money - everybody else, from China to Korea to Singapore to Abu Dhabi - is done giving money to Wall Street. And not all of them have yet reported third quarter losses. And none of them have yet reported fourth quarter losses.
It's going to get ugly when they do.
Ultimately, even with the TARP money, the banks will just be back to break-even on their losses to date, if that. So the TARP money will have been wasted. Why?
Because the whole notion behind the shift from buying crappy bonds to injecting capital in the banks has been that the latter will encourage banks to lend. Banking is a leverage game: a dollar of capital can be deployed into a multiple of that dollar in loans. And that primes the economic pump, sending cash from Wall Street to Main Street (oh God, I can't believe I just said that).
Paulson even handed out instructions with his TARP checks, telling the banks to go out and lend, much like his boss told us all after 9/11 to go out and shop. (Remember those ads? "Do your business, all over the country." I used to laugh every time I saw them, since "do your business" is what we tell our dogs when we want them to poop.) Paulson's exact words:
"The needs of our economy require that our financial institutions not take this new capital and hoard it, but to deploy it."
While GMAC isn't a bank and didn't get any TARP money, it is a consumer lender. How is it "deploying" its capital?
It sent a letter to all GM dealers yesterday telling them it would not lend money to any would-be car buyer with a FICO score below 700.
The prime cut-off is 680.
This will really help GM sell cars and avoid bankruptcy.
Other banks aren't going to start lending either. They don't want to go back to the days of making loans to people who can't repay them. And the only way they will is if the government nationalizes them, and does it themselves, using our tax dollars.
Gulp!
(There's a third reason Paulson's plan won't work: Paulson's running it.)
************
Here's a sinister little plot for you. Remember why Fannie and Freddie went belly-up? The two largest mortgage insurers in the world, who between them guaranteed more than $5 trillion in loans at their zenith, were originally chartered to buy only "conforming" loans - those that met stringent underwriting standards, and thus were the highest-quality mortgages in the market. But at one point their combined exposure to subprime loans amounted to 48% of their balance sheets.
So what are they up to now that Uncle is at the helm? From the Credit Union Journal:
"The Treasury Department, which took over Fannie Mae and Freddie Mac last month, is directing the two secondary mortgage giants to start buying $40 billion a month of distressed mortgage securities in order to recreate the failing market. Officials plan to pump new liquidity into the secondary market by having Fannie and Freddie buy up subprime, Alt-A and non-performing prime mortgages."
On whose authority? This is an end-around to the TARP. It allows Treasury to ultimately spend the entire $700 billion of TARP money injecting capital into banks, while spending an unlimited amount of money buying crap assets through Fannie and Freddie.
Which is exactly what caused Fannie and Freddie to fail in the first place.
So they're going to make Fannie and Freddie fail again. Only now, we're the shareholders who will take the hit. Write your Congresspersons. This has got to stop, now!
************
Still in a quandary about who to vote for in just a few weeks? This won't make it any easier.
I reported before on McCain's plan to spend $300 billion of the TARP money buying up bad mortgages.
Bold prediction: if John McCain is elected, we will see the largest one-month spike in mortgage delinquencies on record, covering every home whose market value is below its mortgage balance, and/or whose mortgage interest rate is above 5.25%.
As for Obama, he produced his own brilliant idea yesterday. Remember a week ago, when he and every other politician was crying, "We can't let the value of people's retirement accounts keep going down!"?
Well, he wants to let people withdraw up to $10,000 from their tax-deferred retirement accounts, penalty-free. Won't that make the value of the accounts go down, even if the market doesn't?
Both of these guys have clearly taken leave of their senses. Probably just dizzy from running around in circles, screaming, "The sky is falling!"
Besides encouraging dis-saving, this hare-brained scheme has another shortcoming:
The people that would do this wouldn't spend the money to stimulate the economy anyway. They'd probably stash it in their new wall safe. A local news station reported that a local company that sells in-home wall safes has seen sales skyrocket over the past several months. That's confidence in the banking system.
************
Here's another sign of what's to come: remember the money market mutual fund that "broke the buck" last month, spurring panic in the money markets and leading the feds to basically turn money funds into bank deposits by insuring them (even though the FDIC is about broke)? Well, it had promised to distribute $20 billion to its investors by yesterday.
It can't. Why? It doesn't know what its holdings are. Not what they're worth. But how many shares each investor owns.
Gulp!
************
For the people who still blame mark-to-market accounting for the current mess, besides the rational explanations of what it is, how it works and why it's important that I've already provided, here are a couple of more simple rubrics to help you get it.
There was no mark-to-market accounting in 1929. Or in 1987. And the stock market still crashed.
On a similar note, remember how speculators were blamed for the sharp spike in oil prices? How it couldn't possibly be supply and demand fundamentals driving the price?
Suddenly, oil is dropping like a rock. Where are those voices now? Why aren't they blaming speculators for shorting oil? Why are they suddenly accepting the specter of reduced demand from a global recession as a fundamental price driver?
Back to mark-to-market: there have been, in the past, bank bailouts that worked. They were expensive, averaging about 13% of the respective countries' GDP. But some of them worked.
To put that GDP number in perspective, US GDP is around $14 trillion. So the price tag to bail out our banking system would be about $2 trillion. But that doesn't factor in the impact on US inflation, interest rates and tax rates of adding that to an already-trillion dollar deficit. Which is why, in my humble opinion, bailing out US banks won't succeed.
But another reason is that in the case of every successful banking system bailout, the countries have forced immediate write-downs of bad assets to poo levels (poo is just slightly above zero, in case you didn't know).
We want to do just the opposite, and eliminate price transparency altogether. Crazy.
************
Random thought, from a good friend and fellow cynic: why do we call it "nationalizing the banks" when Britain does it, and "injecting capital into the banking system" when we do it?
************
My t-shirt idea of the week: with Iceland now essentially bankrupt, we can cheer ourselves up with t-shirts that proclaim, "At least we're not Iceland."
On the front. The back would read, "Yet."
************
I'll leave you with this additional gem from my wife. Citing the book of Proverbs (Isaiah needs a rest), she referred to the verse that says, "For everything, there is a season ..."
That's akin to seeking the natural course of things. In the markets, there's a time to prosper, and a time to lose your shirt.
But what Washington is trying to do is make it summer all the time. As the leaves start to turn colors and fall, lawmakers are up the trees with Elmer's glue and green spray paint.
Good luck with that.
During last spring's heavy flooding in Iowa and Missouri, we were watching news coverage of residents of river towns frantically putting up sandbags. My wife made the following observation (I'm paraphrasing):
"It's fine, and understandable, that they're doing that. But the river has pretty much gone where it's wanted to go for centuries, and there's really nothing man can do to stop that."
Somebody please tell Hank Paulson and Ben Bernanke. Quick. Before we all drown in a river of debt.
They started out by pretty much ignoring the rising waters.
On July 19 of last year - two days after the Bear Stearns hedge fund collapse - Bernanke told the Senate Banking Committee that losses from the subprime fiasco might total as much as $100 billion.
Today's estimates? According to the IMF, $1.4 trillion. (To be fair, not all of that is directly from subprime. But whether the flooding comes entirely from rainfall directly on the river itself, or whether some of it comes from various tributaries that are also affected by the rain, the guy watching the water level should see the flood coming.)
It's also interesting that less than a month after Bernanke made that bold estimate, his Fed began cutting interest rates, "acknowledging for the first time that an extraordinary policy shift is needed to contain the subprime-mortgage collapse," according to Bloomberg.
So after ignoring the rising waters, Bernanke and Paulson began casually tossing a sandbag here, another there, thinking the raging waters would be "contained." Now, they're throwing everything they've got at it. Come to think of it, since the US is broke and the Fed is insolvent, they're throwing stuff they don't have at it. In the form of money. Mountains of money.
Our money.
But this thing is looking less like a flooded river, and more like one great big honkin' mother of a tsunami.
And by throwing money at it, they're not really throwing sandbags. They're throwing great big buckets of ... water.
See, the river will seek its natural course, and its natural level. As I laid out yesterday, so will markets, whether they be for stocks, real estate, jobs, dollars ... whatever.
And men trying to stop that from happening is as futile as men trying to alter the course of the Mississippi.
Especially when the men are incompetent.
************
Let's get back to that IMF estimate of total losses, because it lies at the heart of part one of the two-part reason Paulson's ever-shifting TARP plan will fail.
Total US bank losses to date have been about $385 billion (for the world, it's $637 billion, or just less than half the IMF forecast). US financials have raised just $338 billion in capital to offset the losses. Now, that doesn't sound too bad - they've raised 88% of what they've lost, so they're only down $50 billion or so.
But they've raised $177 billion of that capital - more than half the total raised - in the third and fourth quarters of this year. And that includes the first round of TARP money - everybody else, from China to Korea to Singapore to Abu Dhabi - is done giving money to Wall Street. And not all of them have yet reported third quarter losses. And none of them have yet reported fourth quarter losses.
It's going to get ugly when they do.
Ultimately, even with the TARP money, the banks will just be back to break-even on their losses to date, if that. So the TARP money will have been wasted. Why?
Because the whole notion behind the shift from buying crappy bonds to injecting capital in the banks has been that the latter will encourage banks to lend. Banking is a leverage game: a dollar of capital can be deployed into a multiple of that dollar in loans. And that primes the economic pump, sending cash from Wall Street to Main Street (oh God, I can't believe I just said that).
Paulson even handed out instructions with his TARP checks, telling the banks to go out and lend, much like his boss told us all after 9/11 to go out and shop. (Remember those ads? "Do your business, all over the country." I used to laugh every time I saw them, since "do your business" is what we tell our dogs when we want them to poop.) Paulson's exact words:
"The needs of our economy require that our financial institutions not take this new capital and hoard it, but to deploy it."
While GMAC isn't a bank and didn't get any TARP money, it is a consumer lender. How is it "deploying" its capital?
It sent a letter to all GM dealers yesterday telling them it would not lend money to any would-be car buyer with a FICO score below 700.
The prime cut-off is 680.
This will really help GM sell cars and avoid bankruptcy.
Other banks aren't going to start lending either. They don't want to go back to the days of making loans to people who can't repay them. And the only way they will is if the government nationalizes them, and does it themselves, using our tax dollars.
Gulp!
(There's a third reason Paulson's plan won't work: Paulson's running it.)
************
Here's a sinister little plot for you. Remember why Fannie and Freddie went belly-up? The two largest mortgage insurers in the world, who between them guaranteed more than $5 trillion in loans at their zenith, were originally chartered to buy only "conforming" loans - those that met stringent underwriting standards, and thus were the highest-quality mortgages in the market. But at one point their combined exposure to subprime loans amounted to 48% of their balance sheets.
So what are they up to now that Uncle is at the helm? From the Credit Union Journal:
"The Treasury Department, which took over Fannie Mae and Freddie Mac last month, is directing the two secondary mortgage giants to start buying $40 billion a month of distressed mortgage securities in order to recreate the failing market. Officials plan to pump new liquidity into the secondary market by having Fannie and Freddie buy up subprime, Alt-A and non-performing prime mortgages."
On whose authority? This is an end-around to the TARP. It allows Treasury to ultimately spend the entire $700 billion of TARP money injecting capital into banks, while spending an unlimited amount of money buying crap assets through Fannie and Freddie.
Which is exactly what caused Fannie and Freddie to fail in the first place.
So they're going to make Fannie and Freddie fail again. Only now, we're the shareholders who will take the hit. Write your Congresspersons. This has got to stop, now!
************
Still in a quandary about who to vote for in just a few weeks? This won't make it any easier.
I reported before on McCain's plan to spend $300 billion of the TARP money buying up bad mortgages.
Bold prediction: if John McCain is elected, we will see the largest one-month spike in mortgage delinquencies on record, covering every home whose market value is below its mortgage balance, and/or whose mortgage interest rate is above 5.25%.
As for Obama, he produced his own brilliant idea yesterday. Remember a week ago, when he and every other politician was crying, "We can't let the value of people's retirement accounts keep going down!"?
Well, he wants to let people withdraw up to $10,000 from their tax-deferred retirement accounts, penalty-free. Won't that make the value of the accounts go down, even if the market doesn't?
Both of these guys have clearly taken leave of their senses. Probably just dizzy from running around in circles, screaming, "The sky is falling!"
Besides encouraging dis-saving, this hare-brained scheme has another shortcoming:
The people that would do this wouldn't spend the money to stimulate the economy anyway. They'd probably stash it in their new wall safe. A local news station reported that a local company that sells in-home wall safes has seen sales skyrocket over the past several months. That's confidence in the banking system.
************
Here's another sign of what's to come: remember the money market mutual fund that "broke the buck" last month, spurring panic in the money markets and leading the feds to basically turn money funds into bank deposits by insuring them (even though the FDIC is about broke)? Well, it had promised to distribute $20 billion to its investors by yesterday.
It can't. Why? It doesn't know what its holdings are. Not what they're worth. But how many shares each investor owns.
Gulp!
************
For the people who still blame mark-to-market accounting for the current mess, besides the rational explanations of what it is, how it works and why it's important that I've already provided, here are a couple of more simple rubrics to help you get it.
There was no mark-to-market accounting in 1929. Or in 1987. And the stock market still crashed.
On a similar note, remember how speculators were blamed for the sharp spike in oil prices? How it couldn't possibly be supply and demand fundamentals driving the price?
Suddenly, oil is dropping like a rock. Where are those voices now? Why aren't they blaming speculators for shorting oil? Why are they suddenly accepting the specter of reduced demand from a global recession as a fundamental price driver?
Back to mark-to-market: there have been, in the past, bank bailouts that worked. They were expensive, averaging about 13% of the respective countries' GDP. But some of them worked.
To put that GDP number in perspective, US GDP is around $14 trillion. So the price tag to bail out our banking system would be about $2 trillion. But that doesn't factor in the impact on US inflation, interest rates and tax rates of adding that to an already-trillion dollar deficit. Which is why, in my humble opinion, bailing out US banks won't succeed.
But another reason is that in the case of every successful banking system bailout, the countries have forced immediate write-downs of bad assets to poo levels (poo is just slightly above zero, in case you didn't know).
We want to do just the opposite, and eliminate price transparency altogether. Crazy.
************
Random thought, from a good friend and fellow cynic: why do we call it "nationalizing the banks" when Britain does it, and "injecting capital into the banking system" when we do it?
************
My t-shirt idea of the week: with Iceland now essentially bankrupt, we can cheer ourselves up with t-shirts that proclaim, "At least we're not Iceland."
On the front. The back would read, "Yet."
************
I'll leave you with this additional gem from my wife. Citing the book of Proverbs (Isaiah needs a rest), she referred to the verse that says, "For everything, there is a season ..."
That's akin to seeking the natural course of things. In the markets, there's a time to prosper, and a time to lose your shirt.
But what Washington is trying to do is make it summer all the time. As the leaves start to turn colors and fall, lawmakers are up the trees with Elmer's glue and green spray paint.
Good luck with that.
Monday, October 13, 2008
Truth, and Consequences
As I write this, the Dow is up more than 400 points because G7 leaders met ever so briefly to pledge they'd capitalize their respective countries' banks, and because Henry Paulson announced that's what he'll do with the TARP money.
A. We got a similar rally when Congress first began talking about "doing something." Remember what happened since then?
B. Paulson started hinting last week that he'd deploy the TARP money by directly infusing capital into banks. What's new?
C. All this demonstrates is that the guy in charge of righting the ship can't make a sound decision. And this instills confidence in the markets? I guess it also demonstrates that when stock traders want a rally, they'll produce one.
But make no mistake: this is a dead-cat bounce.
True, last week's massive sell-off was, in part, fear-induced. But the fears were well-founded. They were the fear of a recession that is inevitable no matter how many fingers Hank is able to put in the dike, and the fear of what a trillion dollar deficit will do to the US dollar, tax rates and interest rates.
President Bush has been trying to jawbone the fears away, much as FDR did in his inauguration speech in 1933, when he famously said, "We have nothing to fear but fear itself."
I agree. But I have to point out that his words didn't change much. The US economy and the stock market ultimately recovered in 1946.
Okay, let's turn our attention to consequences. I want to hit on several things that the Chicken Littles have been crying for in begging the government to "do something." I'll couch each in terms of paraphrased quotes that represent things we've all been hearing, unless we've kept our TVs and radios off for the last month (in which case, kudos to you).
"We can't let home prices keep falling."
First, I'm sympathetic to the notion of a family losing their home to foreclosure. What a terrible experience that would be. I wouldn't want it to happen to me.
That's why, when I bought a house, I saved a reasonable down payment first, researched the market, got a fixed-rate loan with payments I could afford, and made sure I didn't spend so much money on other stuff that I couldn't make the mortgage payment first and foremost.
That's why, if my home price did decline below my mortgage balance, I'd recognize that it's still my home, and not an investment, and that if I continue paying the mortgage down, the home price will eventually recover, and I'll once again own more than I owe. Because I know that, just as home prices can't go up forever, they can't go down forever either.
And that's why, if I did lose my job, I'd sell everything else I had, work two or three jobs if I had to, to be able to continue making my mortgage payment on time.
I recognize that not everyone is in my situation. And I also believe that the expansion of homeownership is a worthwhile goal, both economically and socially. But here's a simple fact: about 65% of Americans can actually afford to be homeowners. The only way we can expand homeownership above that number is by some kind of financial artifice.
That's exactly what happened in the subprime fiasco: a perfect storm of regulatory pressure, credit scoring, financial "innovation," Wall Street risk-parsing, and dubious marketing.
And, in the end, we did no favors shoe-horning a renter into a home he or she could not afford, letting them live in it for a few years, then taking it away from them.
(It kind of reminds me of how the S&L regulators enticed healthy thrifts to take over sick ones by letting them book "goodwill" as capital, then, after a few years, they took away the "goodwill," declared them insolvent, and shut them down, too.)
Here's how markets work: they go up, and they go down. Why? Because the sometimes go up at a pace above their long-term sustainable rate of growth. In housing, that should be roughly akin to the rate of inflation, discounting extreme supply and demand factors in certain markets like Manhattan. And that rate is about 3-4%.
Well, home prices went up by double digits for several years due to the subprime frenzy and the speculative excess it spawned. Everywhere. Not just in places like Manhattan, but in places where there's plenty of buildable land.
That is a classic example of a bubble. And every bubble demands a correction.
Here's a little exercise for you. Look at the S&P/Case-Shiller Home Price Index for each of the 20 metro markets it covers. Go back to before the housing bubble began, and plot the trendline at the long-term sustainable growth rate for that particular market, whatever it happens to be. Trace it all the way out to the end of 2008.
And you'll find that home prices still have not fallen to where they should be.
"Stop home prices from falling further?" Go ahead and try. Home prices have to fall further, to reach market equilibrium. How is Washington going to stop that from happening? Fix home prices? Say, "You have to buy a house this year, and you have to pay no less than X?"
The day they start doing that, color me gone.
It is both a truth and a consequence that home prices are going to fall further.
"People are losing money in their 401(k)s - we have to do something about that."
I find this almost comical. It was Washington, influenced by businesses, that led the grand exodus from defined benefit to defined contribution retirement plans to begin with. In doing so, they placed the risk directly on the shoulders of the employees.
We took that risk. We make money in the good times, and, unless we successfully rebalance, we lose money in the bad times.
On paper.
Look, if you were planning to retire next year, and now can't, I truly sympathize. I'm sorry you continued to expose yourself to too much risk for your age and life situation, and that you now face the consequences.
But I've had at least two retirees call me to ask if they should move their money. When I asked them what they were invested in, they said they were in a balanced lifestyle fund targeted to their age, invested mostly in bonds, and that it was returning around 4.75% year-to-date.
I told them if they were making money in this environment, they were fine.
But what about the guy who's 30, and fully allocated to equities?
Well, by the time he retires, he'll likely earn the long-term, sustainable historical average that stocks have returned, of about 11%. If he's diversified somewhat into bonds, maybe 8%.
That's more than twice the inflation rate. That should allow any diligent saver to retire comfortably. Only greed could make us expect higher returns than that.
Oh, but we do, because we are indeed greedy. We see those bubbly 25% returns for a couple of years, and it gets good to us. We think it'll go on forever.
See, this is the same story as housing. Only here, the long-term sustainable growth rate is, as I said, about 11%. So let's try the same exercise we tried above.
Go back to before the dot-com bubble, which was inflated by easy money beginning in late 1998, when Greenspan bailed out the Long-Term Capital Management hedge fund (important lesson: bailouts inflate bubbles, and bubbles burst, creating severe corrections). Plot the long-term sustainable growth rate of stock prices - pick any index - from about 1982, when the long-term bull market began, through year-end 2008.
You'll find that when the dot-com bubble began, stocks appreciated at a rate well above what could be sustained. Then it corrected from 2000 to 2002 - hard. But it didn't get all the way down to where it needed to be. Why?
Government intervention. A bailout, again in the form of too-easy money, again courtesy of Alan Greenspan, and again igniting a fresh bubble. This time, in housing.
You'll also find that, even with last week's carnage, the stock market still has not corrected to where its long-term sustainable growth rate would peg it. That level is around 7-8,000 on the Dow, or about 700 on the S&P, or about 1,400 on the NASDAQ.
So we're fairly close. The bad news is, the way corrections work, the market may fall below that mark, then rebound to it.
In the case of stock prices, it is theoretically easier for the government to intervene in a way that props them up, than it is for house prices.
They can simply keep pumping federal money into the economy until growth resumes, and stock prices go up on the prospects for that growth.
But for one thing, that only creates a new bubble. And three massive bubbles in a row, within a relatively short time frame, would totally destroy the US economy, and take the rest of the world with it.
And for another, the theory doesn't work when you're facing a trillion dollar deficit, and when your national debt is approaching 100% of GDP.
You then become a net-debtor nation, and in order to finance all that spending, you have to a) raise taxes by a massive amount, which further depresses spending and investment and causes further economic decline, as happened when Hoover raised taxes in 1932, and b) pay much higher interest rates on government debt you issue, in order to entice foreign investors, who hold the bulk of it, to buy more.
Folks, that is already happening. The ten-year Treasury yield has been rising since the last rate cut. Why? The ten-year note, since it matures in ten years, anticipates future events. A ten-year note trades like a strip of ten one-year bills. And if investors think that bill yields will go higher over the next ten years, they demand higher rates on the ten-year note.
What happens when those rates go up? Well, for one thing, 30-year fixed-rate mortgages are priced off the ten-year. So mortgage rates will go up, even if the Fed cuts the funds target to zero. That won't help solve the housing-led crisis we're in.
Another consequence is that the government has to print even more money, because it's now paying even more in interest - money it doesn't have, because it's still deficit spending. So the deficit gets wider, and that drives rates higher, in a never-ending inflationary spiral.
And they might as well buy every man, woman and child in the country a wheelbarrow in which to take their worthless US dollars to the grocery store.
So here's another truth, and another consequence: when you've enjoyed well-above-trend returns on your 401(k) for several years, you have to expect well-below-trend returns - and probably losses - for a while to get you back on trend. You should plan on the trend, take the good times with a grain of salt, and not worry through the bad times. And, as you near retirement, get out of the risky stuff to an increasing degree.
"We have to keep people from losing their homes."
This is closely related to the home price issue, and I've addressed it before, so I won't belabor it. But here's one important point.
Let's say we're going to pursue the McCain solution of refinancing all the "bad" mortgages into 30-year, fixed rate mortgages at 5.25%. Besides the near-impossible task of finding who now owns all those mortgages, piecing the tranches back together into whole loans, and buying them up - and besides the fact that most of those mortgagors won't be able to make the payments even at 5.25% now - here's the fundamental flaw:
Who will hold the mortgages? Banks won't. They're currently getting more than 5.25% on the mortgages they make. And they're through with making loans to people with impaired credit, who probably won't pay them back.
Investors won't either, for the same reasons. Their risk appetite has waned considerably. And they're back to pricing risk appropriately. So they won't pay par for a 5.25% mortgage-backed bond with a ton of credit risk.
That leaves Uncle Sam - you and me. And that's just what's being proposed. They say we'll ultimately make money on this.
So we're going to accept a 5.25% return on mortgages in a 6%-plus market, with rates sure to rise even further. And suffer eventual default rates that are about what they currently are on the subprime ARMs we're replacing.
Tell me again how we make money on that trade?
Fact is, we don't. We lose on the subsidized yield, we lose even more in a rising rate environment, and we suffer principal losses when they default - which, by the way leads to another glut of foreclosed homes on the market, which creates another overall housing slump.
And the ultimate direct cost to the taxpayer alone will be much, much more than $300 billion.
So, once more, it is both a truth and a consequence that more people are going to lose their homes.
"If we don't do something, people are going to lose their jobs."
Guess what? They already are. And that happens in every recession. Is the government proposing to guarantee that everyone has a job? (Perhaps - the trial balloon of resurrecting the WPA has already been floated .)
Furthermore, about 800,000 people have already lost their jobs since January. If the government spends a ton of money ensuring, somehow, that no one will lose their job going forward, how do they explain the timing of their actions to the guy or gal that got canned in January?
Truth and consequence: more people are going to lose their jobs.
"If we don't act now, more banks will fail."
How many new banks and bank branches have cropped up on every street corner over the past ten years? Can't we live with a few less banks?
Look, bank growth exploded during the housing bubble, because everybody wanted to get into the hyper-profitable lend-and-sell loan game. So it is only a natural consequence that the number of banks will contract when the demand for credit drops sharply.
During the S&L crisis, 747 institutions failed. Thus far in this debacle, 15 have gone down.
The truth is, we have a long, long way to go before we get back to equilibrium.
"We have to un-freeze the credit markets so people will start borrowing again."
Why are so many people whose ARM rates, and thus their mortgage payments, risen, defaulting on the loans?
Because they can't afford the higher mortgage payments when they already have two six-year car loans on brand-new luxury cars they bought with no money down, and several maxed-out credit cards, which combined eat up all of their take-home pay.
As with the banks, we need less credit right now. It is a natural and healthy cleansing of a system that got bloated with greed and excess, which was unnatural and unhealthy. So let's purge it.
More borrowing is not the answer. It's like a glutton who becomes obscenely obese, to the point that he becomes diabetic and has a heart attack.
So the doctors put him in the hospital and work to regulate his blood sugar and do a triple bypass. But they say, "Why, he's become so accustomed to his three milkshakes a day and his quart of ice cream at bedtime - we can't deprive him of that!" So they continue to gorge him. What eventually happens?
Again, I am totally sympathetic to the notion of people losing their jobs, their homes, and a portion of their retirement savings. A big part of the problem, though, is that we focus on those things, and place our faith in dollar-denominated things.
We have survived recessions before. Some of us have lived in poverty. Some of us have survived even worse: the Holocaust, ethnic cleansing in Eastern Europe or Africa, etc.
The key word is "survive." Many who have made it through bad experiences unscathed have been able to do so by placing our faith in the only One that can ultimately sustain us.
But in a nation that increasingly attempts to separate itself from the Creator it acknowledged at its birth, we're becoming increasingly reliant on government - man - to fix things.
And they can't.
The more they try, the worse it gets. So please, Washington, get the message: go home. Visit your constituents. Listen to them, not to your pals on Wall Street. Pay attention when they tell you, "Enough, already!" Then go on a nice junket or whatever you do on your lengthy recesses.
Because the more you spend, the worse it ultimately gets.
The fundamental message is, "We do not have faith in you."
A. We got a similar rally when Congress first began talking about "doing something." Remember what happened since then?
B. Paulson started hinting last week that he'd deploy the TARP money by directly infusing capital into banks. What's new?
C. All this demonstrates is that the guy in charge of righting the ship can't make a sound decision. And this instills confidence in the markets? I guess it also demonstrates that when stock traders want a rally, they'll produce one.
But make no mistake: this is a dead-cat bounce.
True, last week's massive sell-off was, in part, fear-induced. But the fears were well-founded. They were the fear of a recession that is inevitable no matter how many fingers Hank is able to put in the dike, and the fear of what a trillion dollar deficit will do to the US dollar, tax rates and interest rates.
President Bush has been trying to jawbone the fears away, much as FDR did in his inauguration speech in 1933, when he famously said, "We have nothing to fear but fear itself."
I agree. But I have to point out that his words didn't change much. The US economy and the stock market ultimately recovered in 1946.
Okay, let's turn our attention to consequences. I want to hit on several things that the Chicken Littles have been crying for in begging the government to "do something." I'll couch each in terms of paraphrased quotes that represent things we've all been hearing, unless we've kept our TVs and radios off for the last month (in which case, kudos to you).
"We can't let home prices keep falling."
First, I'm sympathetic to the notion of a family losing their home to foreclosure. What a terrible experience that would be. I wouldn't want it to happen to me.
That's why, when I bought a house, I saved a reasonable down payment first, researched the market, got a fixed-rate loan with payments I could afford, and made sure I didn't spend so much money on other stuff that I couldn't make the mortgage payment first and foremost.
That's why, if my home price did decline below my mortgage balance, I'd recognize that it's still my home, and not an investment, and that if I continue paying the mortgage down, the home price will eventually recover, and I'll once again own more than I owe. Because I know that, just as home prices can't go up forever, they can't go down forever either.
And that's why, if I did lose my job, I'd sell everything else I had, work two or three jobs if I had to, to be able to continue making my mortgage payment on time.
I recognize that not everyone is in my situation. And I also believe that the expansion of homeownership is a worthwhile goal, both economically and socially. But here's a simple fact: about 65% of Americans can actually afford to be homeowners. The only way we can expand homeownership above that number is by some kind of financial artifice.
That's exactly what happened in the subprime fiasco: a perfect storm of regulatory pressure, credit scoring, financial "innovation," Wall Street risk-parsing, and dubious marketing.
And, in the end, we did no favors shoe-horning a renter into a home he or she could not afford, letting them live in it for a few years, then taking it away from them.
(It kind of reminds me of how the S&L regulators enticed healthy thrifts to take over sick ones by letting them book "goodwill" as capital, then, after a few years, they took away the "goodwill," declared them insolvent, and shut them down, too.)
Here's how markets work: they go up, and they go down. Why? Because the sometimes go up at a pace above their long-term sustainable rate of growth. In housing, that should be roughly akin to the rate of inflation, discounting extreme supply and demand factors in certain markets like Manhattan. And that rate is about 3-4%.
Well, home prices went up by double digits for several years due to the subprime frenzy and the speculative excess it spawned. Everywhere. Not just in places like Manhattan, but in places where there's plenty of buildable land.
That is a classic example of a bubble. And every bubble demands a correction.
Here's a little exercise for you. Look at the S&P/Case-Shiller Home Price Index for each of the 20 metro markets it covers. Go back to before the housing bubble began, and plot the trendline at the long-term sustainable growth rate for that particular market, whatever it happens to be. Trace it all the way out to the end of 2008.
And you'll find that home prices still have not fallen to where they should be.
"Stop home prices from falling further?" Go ahead and try. Home prices have to fall further, to reach market equilibrium. How is Washington going to stop that from happening? Fix home prices? Say, "You have to buy a house this year, and you have to pay no less than X?"
The day they start doing that, color me gone.
It is both a truth and a consequence that home prices are going to fall further.
"People are losing money in their 401(k)s - we have to do something about that."
I find this almost comical. It was Washington, influenced by businesses, that led the grand exodus from defined benefit to defined contribution retirement plans to begin with. In doing so, they placed the risk directly on the shoulders of the employees.
We took that risk. We make money in the good times, and, unless we successfully rebalance, we lose money in the bad times.
On paper.
Look, if you were planning to retire next year, and now can't, I truly sympathize. I'm sorry you continued to expose yourself to too much risk for your age and life situation, and that you now face the consequences.
But I've had at least two retirees call me to ask if they should move their money. When I asked them what they were invested in, they said they were in a balanced lifestyle fund targeted to their age, invested mostly in bonds, and that it was returning around 4.75% year-to-date.
I told them if they were making money in this environment, they were fine.
But what about the guy who's 30, and fully allocated to equities?
Well, by the time he retires, he'll likely earn the long-term, sustainable historical average that stocks have returned, of about 11%. If he's diversified somewhat into bonds, maybe 8%.
That's more than twice the inflation rate. That should allow any diligent saver to retire comfortably. Only greed could make us expect higher returns than that.
Oh, but we do, because we are indeed greedy. We see those bubbly 25% returns for a couple of years, and it gets good to us. We think it'll go on forever.
See, this is the same story as housing. Only here, the long-term sustainable growth rate is, as I said, about 11%. So let's try the same exercise we tried above.
Go back to before the dot-com bubble, which was inflated by easy money beginning in late 1998, when Greenspan bailed out the Long-Term Capital Management hedge fund (important lesson: bailouts inflate bubbles, and bubbles burst, creating severe corrections). Plot the long-term sustainable growth rate of stock prices - pick any index - from about 1982, when the long-term bull market began, through year-end 2008.
You'll find that when the dot-com bubble began, stocks appreciated at a rate well above what could be sustained. Then it corrected from 2000 to 2002 - hard. But it didn't get all the way down to where it needed to be. Why?
Government intervention. A bailout, again in the form of too-easy money, again courtesy of Alan Greenspan, and again igniting a fresh bubble. This time, in housing.
You'll also find that, even with last week's carnage, the stock market still has not corrected to where its long-term sustainable growth rate would peg it. That level is around 7-8,000 on the Dow, or about 700 on the S&P, or about 1,400 on the NASDAQ.
So we're fairly close. The bad news is, the way corrections work, the market may fall below that mark, then rebound to it.
In the case of stock prices, it is theoretically easier for the government to intervene in a way that props them up, than it is for house prices.
They can simply keep pumping federal money into the economy until growth resumes, and stock prices go up on the prospects for that growth.
But for one thing, that only creates a new bubble. And three massive bubbles in a row, within a relatively short time frame, would totally destroy the US economy, and take the rest of the world with it.
And for another, the theory doesn't work when you're facing a trillion dollar deficit, and when your national debt is approaching 100% of GDP.
You then become a net-debtor nation, and in order to finance all that spending, you have to a) raise taxes by a massive amount, which further depresses spending and investment and causes further economic decline, as happened when Hoover raised taxes in 1932, and b) pay much higher interest rates on government debt you issue, in order to entice foreign investors, who hold the bulk of it, to buy more.
Folks, that is already happening. The ten-year Treasury yield has been rising since the last rate cut. Why? The ten-year note, since it matures in ten years, anticipates future events. A ten-year note trades like a strip of ten one-year bills. And if investors think that bill yields will go higher over the next ten years, they demand higher rates on the ten-year note.
What happens when those rates go up? Well, for one thing, 30-year fixed-rate mortgages are priced off the ten-year. So mortgage rates will go up, even if the Fed cuts the funds target to zero. That won't help solve the housing-led crisis we're in.
Another consequence is that the government has to print even more money, because it's now paying even more in interest - money it doesn't have, because it's still deficit spending. So the deficit gets wider, and that drives rates higher, in a never-ending inflationary spiral.
And they might as well buy every man, woman and child in the country a wheelbarrow in which to take their worthless US dollars to the grocery store.
So here's another truth, and another consequence: when you've enjoyed well-above-trend returns on your 401(k) for several years, you have to expect well-below-trend returns - and probably losses - for a while to get you back on trend. You should plan on the trend, take the good times with a grain of salt, and not worry through the bad times. And, as you near retirement, get out of the risky stuff to an increasing degree.
"We have to keep people from losing their homes."
This is closely related to the home price issue, and I've addressed it before, so I won't belabor it. But here's one important point.
Let's say we're going to pursue the McCain solution of refinancing all the "bad" mortgages into 30-year, fixed rate mortgages at 5.25%. Besides the near-impossible task of finding who now owns all those mortgages, piecing the tranches back together into whole loans, and buying them up - and besides the fact that most of those mortgagors won't be able to make the payments even at 5.25% now - here's the fundamental flaw:
Who will hold the mortgages? Banks won't. They're currently getting more than 5.25% on the mortgages they make. And they're through with making loans to people with impaired credit, who probably won't pay them back.
Investors won't either, for the same reasons. Their risk appetite has waned considerably. And they're back to pricing risk appropriately. So they won't pay par for a 5.25% mortgage-backed bond with a ton of credit risk.
That leaves Uncle Sam - you and me. And that's just what's being proposed. They say we'll ultimately make money on this.
So we're going to accept a 5.25% return on mortgages in a 6%-plus market, with rates sure to rise even further. And suffer eventual default rates that are about what they currently are on the subprime ARMs we're replacing.
Tell me again how we make money on that trade?
Fact is, we don't. We lose on the subsidized yield, we lose even more in a rising rate environment, and we suffer principal losses when they default - which, by the way leads to another glut of foreclosed homes on the market, which creates another overall housing slump.
And the ultimate direct cost to the taxpayer alone will be much, much more than $300 billion.
So, once more, it is both a truth and a consequence that more people are going to lose their homes.
"If we don't do something, people are going to lose their jobs."
Guess what? They already are. And that happens in every recession. Is the government proposing to guarantee that everyone has a job? (Perhaps - the trial balloon of resurrecting the WPA has already been floated .)
Furthermore, about 800,000 people have already lost their jobs since January. If the government spends a ton of money ensuring, somehow, that no one will lose their job going forward, how do they explain the timing of their actions to the guy or gal that got canned in January?
Truth and consequence: more people are going to lose their jobs.
"If we don't act now, more banks will fail."
How many new banks and bank branches have cropped up on every street corner over the past ten years? Can't we live with a few less banks?
Look, bank growth exploded during the housing bubble, because everybody wanted to get into the hyper-profitable lend-and-sell loan game. So it is only a natural consequence that the number of banks will contract when the demand for credit drops sharply.
During the S&L crisis, 747 institutions failed. Thus far in this debacle, 15 have gone down.
The truth is, we have a long, long way to go before we get back to equilibrium.
"We have to un-freeze the credit markets so people will start borrowing again."
Why are so many people whose ARM rates, and thus their mortgage payments, risen, defaulting on the loans?
Because they can't afford the higher mortgage payments when they already have two six-year car loans on brand-new luxury cars they bought with no money down, and several maxed-out credit cards, which combined eat up all of their take-home pay.
As with the banks, we need less credit right now. It is a natural and healthy cleansing of a system that got bloated with greed and excess, which was unnatural and unhealthy. So let's purge it.
More borrowing is not the answer. It's like a glutton who becomes obscenely obese, to the point that he becomes diabetic and has a heart attack.
So the doctors put him in the hospital and work to regulate his blood sugar and do a triple bypass. But they say, "Why, he's become so accustomed to his three milkshakes a day and his quart of ice cream at bedtime - we can't deprive him of that!" So they continue to gorge him. What eventually happens?
Again, I am totally sympathetic to the notion of people losing their jobs, their homes, and a portion of their retirement savings. A big part of the problem, though, is that we focus on those things, and place our faith in dollar-denominated things.
We have survived recessions before. Some of us have lived in poverty. Some of us have survived even worse: the Holocaust, ethnic cleansing in Eastern Europe or Africa, etc.
The key word is "survive." Many who have made it through bad experiences unscathed have been able to do so by placing our faith in the only One that can ultimately sustain us.
But in a nation that increasingly attempts to separate itself from the Creator it acknowledged at its birth, we're becoming increasingly reliant on government - man - to fix things.
And they can't.
The more they try, the worse it gets. So please, Washington, get the message: go home. Visit your constituents. Listen to them, not to your pals on Wall Street. Pay attention when they tell you, "Enough, already!" Then go on a nice junket or whatever you do on your lengthy recesses.
Because the more you spend, the worse it ultimately gets.
The fundamental message is, "We do not have faith in you."
Sunday, October 12, 2008
Of Prophets
In a recent post I quoted the prophet Isaiah, who apparently foretold the housing bust. Okay, not really, but he did wisely warn against the perils of greed, and the consequences of excess.
Here's one more gem from Isaiah, this time chapter 15, verse 9:
"Dimon's waters are full of blood, but I will bring still more upon Dimon ..."
For the uninitiated, the CEO of JPMorgan Chase, which acquired what was left of Bear Stearns in a federally-assisted shotgun wedding in March, and which is rumored to have forced the sale of Merrill Lynch to B of A by calling in Merrill's lines of credit, is a man named ...
Jamie Dimon.
Back when Dimon was CEO of Bank One, he was reported to have once said about the banks' competitors, "I hate them! I want them to bleed!" Hmmm.
Now, I'm no Isaiah, but I thought I'd retrace some of my prognostications over the past year and a half. Not to pat myself on the back, but to establish some street cred - or should I say Street cred, as in Wall Street - before talking a bit about what's coming. And that needs to be talked about, because no one in the media is talking about it, nor is anyone in Washington, or on Wall Street, or on Main Street (by the way, if I hear a politician utter the "Wall Street - Main Street" sound bite one more time, I swear I will vomit).
April, 2007. In an article titled, "The US Economy in 2007: Headed South for the Winter?", which appeared in our company's newsletter, MarketCast (you can read it at www.cnbsnet.com; click on "MarketCast," then "Search all MarketCast articles," then use the pull-down menu to pick the month and year), I predicted a recession in late 2007 or early 2008.
The tools I used to make this call were the behavioral patterns of three economic indicators that have proven to be generally reliable predictors of recessions: the Chicago Purchasing Managers' Index, the Leading Economic Indicators index on a year-over-year basis, and the spread between the two- and ten-year Treasury note yields. All three signs pointed to a recession six to 12 months hence.
Now, we have not yet met the traditional definition of a recession, defined by the National Bureau of Economic Research (NBER) as two or more consecutive quarters of negative GDP growth. But the last recession, in 2001, didn't even meet that definition, even though the NBER recognized it as a recession.
And many economists - including yours truly - believe the NBER definition is useless, as it means a recession can only be identified in hindsight. It's like driving a car on a mountain road, with tight curves and steep drop-offs, navigating with nothing but your rear-view mirror.
And many economists are now saying we've been in a functional recession since the first quarter.
May, 2007. I followed up with another MarketCast article whose title was taken from a famous quote by then-President George H.W. Bush: "As Housing Goes, So Goes the Economy?" In that piece, I used the historical relationship between the National Association of Home Builders (NAHB) sentiment index and the S&P 500 (as a proxy for the health of the economy) to predict a recession, and a downturn in the stock market.
A steep one.
The correlation between the NAHB index and the S&P, lagged about 18 months (the idea being that housing downturns lead economic contractions by about that length of time) is quite high - over 83% at the time I wrote the article. Also at that time, the NAHB index appeared to have begun to turn up. So on that basis, I predicted we'd see the S&P start dropping, and fall for about 18 months, which would have put the bottom at about November of this year. I called for a "sharp correction," but stopped short of pegging the S&P's ultimate low at the point suggested by the trend.
That low was 600. The S&P closed at 899 Friday, and traded below 840.
But, the NAHB index did not continue rising. It fell further, and sharply. At the time of the article's publication, the latest reading was around 40, after it had hit a bottom of 30 a few months earlier. It ultimately fell as low as 16, just a couple months ago. Then it ticked up to 18 last month.
It's due out next week, and is forecast to have fallen back down to 17. In other words, we may not have seen the bottom yet. Even if we have, though, the bottom in the S&P is likely about 16 months from now. I don't want to think about the level.
December, 2007. I wrote a follow-up piece titled, "Recession Indicators Revisited." In it, I noted that there had been significant fluctuation in the Chicago Purchasing Managers' Index, thus the signal was not entirely clear. But I noted that the only support for the factory sector in 2007 had been foreign demand for US exports, which were cheap due to the dollar's weakness versus most foreign currencies, as economies abroad were, at the time, relatively healthy.
I maintained my LEI year-over-year prediction, and I noted that the duration of the most recent yield curve inversion might lengthen the time between the two-year/ten-year spread reaching a positive 50 basis points (half a percent) and the onset of recession. And I noted the reversal of fortunes for the NAHB index.
I also added this warning:
"[T]he domestic economy has been sustained to some degree this time by a more global economy. That latter point has resulted in strong foreign demand from robust economies abroad that have sustained output in the U.S., owing in large part to the ever-weakening dollar. But some of those economies are at fragile points themselves, and several have their own mounting housing crises. We've seen the spread of the U.S. housing contagion overseas; it'll be that much worse when other countries' housing slumps hit full bloom. And the worst isn't yet over for our own housing market."
Finally, I addressed the Dow Theory, which holds that holds that a bearish trend in the Transportation Index, accompanied by the testing of a recent low in the Industrials, indicates the beginning of a full-fledged bear market in the Industrial Average. I noted that those conditions had been met in November, signaling a bear market may be underway.
Of course, we now know the market peaked in October, and now easily meets the definition of a bear market.
I've also given numerous presentations over the last year where I predicted housing would not recover before 2010; that credit market conditions would become dire; that the more the government intervened, the worse things would get; and that we could face a prolonged and painful downturn - by "prolonged and painful" I mean something akin to Japan's "Lost Decade," or, with sufficient government monkeying, a depression. Some of this doom and gloom you've read here.
A quick recap of some other, recent warnings:
1. A week before Labor Day, I predicted Fannie and Freddie would fail by the holiday. Missed that one by six days.
2. On Friday, September 12, I predicted that Lehman would go belly-up or be rescued the following Monday. Nailed that one. I also predicted that WaMu was toast. The toast was done two weeks later.
3. In our firm's quarterly economic outlook contest, my predictions for the third quarter were the most dire that I or anyone else in the company had ever made.
They were also the most accurate since we've been doing the forecast.
4. I should also point out that I bailed out of stocks in my daughter's 529 plan last October, and in the rest of our accounts in March. We even went short the market in my wife's IRA, which is up a healthy 60% since then - and that's not annualized.
Now, I'd like to turn my attention to a brief (for me) overview of what's to come - and these things are not yet fully priced into stocks.
Manufacturing
As I noted, the factory sector, normally a casualty of an economic downturn, remained resilient through 2007 and the first half of 2008 due to the weak dollar and strong foreign demand. But my prediction that foreign economies would soon weaken has come true, in spades. Heck, the entire nation of Iceland may go bankrupt, and take much of the British banking system with it.
The result of the rapid weakening of foreign demand has been a most unwelcome inventory bulge in US factories and businesses. That's evident in the Wholesale and Business Inventories series, both of which were still rising at last check. But these data series lag, so "last check" in this case is August.
More recent evidence is available from the regional Fed banks' survey-based manufacturing indices, plus the Chicago Purchasing Managers' Index noted above, and the national Institute for Supply Management Index. These measures are coincident, meaning the data is released during the month for which it reports. We'll see the first of these numbers for October next week, for example. And the forecasts are gloomy.
But - more important - beginning in September we started to see the inventory components of those measures come down. Way down. How do factories reduce inventory overhangs, when nobody's buying anymore?
1. Slash prices, which hurts profits.
2. Slash production, which idles workers.
Both measures result in layoffs.
So here's the factory sector outlook: a sharp contraction in the fourth quarter, and weakness throughout 2009, and at least until both domestic and global economies gain strength. Which could be quite a while.
Retail
Retailers are bracing for a dismal holiday season. Consumer credit actually contracted - meaning people paid off more than they borrowed - for the first time in more than a decade in August, posting the sharpest drop ever.
Why is that significant? Three reasons. First, August is back-to-school shopping month, the penultimate month in the retailer's season. Second, August saw a spike in auto sales due to deep end-of-model-year discounting. Absent the auto lending that took place in August, how much more would credit have contracted? And third, August pre-dated the current "credit freeze" everyone's screeching about.
Look for retailers' fourth-quarter numbers to be down. Way down. And look for major retrenchment in the sector after year-end.
Employment
One of my predictions throughout the first quarter of 2007 was that we'd see jobless claims begin to trend higher in the second quarter. I was wrong. I missed it by a quarter. Claims began trending upward in July, with the pace accelerating in November, then going vertical of late. The US economy has suffered net job losses every month this year, and the total loss is around 800,000 jobs.
That's about half what we'll lose next year.
Part of the reason for that is the continued decline in the financial sector and construction. Part of it is that companies that have been able to hang on by just letting attrition run its course and freezing new hires, will have to start cutting. That hasn't been widespread yet. It will be in 2009. And part of it is that the previously resilient factory and retail sectors will, as noted above, slow sharply.
Housing
The correction is not done yet. The bottom hasn't arrived. Inventories are still too high. And now the negative wealth effect from stocks' decline is sidelining more would-be buyers, which will prolong the downturn.
And, starting in 2010, we're going to see the beginnings of a non-bubble-related, systematic housing correction, one that has to do with the aging of the Baby Boomers and their reduced demand for housing, with fewer Gen X, Y, Z, Millennials, and whoever else is coming up the ranks to fill those vacated homes.
Stocks panicked last week, primarily over the "credit freeze," and lawmakers' impotence in staving off a recession, which market participants should know is impossible. So in essence, we've begun, finally, to price a recession into stocks.
But we have yet to price in the earnings numbers we're going to see from the factory sector for the fourth quarter, and the outlooks they'll print for 2009. We have yet to see the retailers' holiday numbers, or their 2009 guidance. We have yet to see the labor trends. And we have yet to see the bottom in housing, or the end of bank failures.
None of that is priced into the market. So when those things come to realization, the market will go down further.
Tomorrow, we'll take a look at the consequences of excess and leverage, and why government should stop the madness and just leave the markets alone.
Here's one more gem from Isaiah, this time chapter 15, verse 9:
"Dimon's waters are full of blood, but I will bring still more upon Dimon ..."
For the uninitiated, the CEO of JPMorgan Chase, which acquired what was left of Bear Stearns in a federally-assisted shotgun wedding in March, and which is rumored to have forced the sale of Merrill Lynch to B of A by calling in Merrill's lines of credit, is a man named ...
Jamie Dimon.
Back when Dimon was CEO of Bank One, he was reported to have once said about the banks' competitors, "I hate them! I want them to bleed!" Hmmm.
Now, I'm no Isaiah, but I thought I'd retrace some of my prognostications over the past year and a half. Not to pat myself on the back, but to establish some street cred - or should I say Street cred, as in Wall Street - before talking a bit about what's coming. And that needs to be talked about, because no one in the media is talking about it, nor is anyone in Washington, or on Wall Street, or on Main Street (by the way, if I hear a politician utter the "Wall Street - Main Street" sound bite one more time, I swear I will vomit).
April, 2007. In an article titled, "The US Economy in 2007: Headed South for the Winter?", which appeared in our company's newsletter, MarketCast (you can read it at www.cnbsnet.com; click on "MarketCast," then "Search all MarketCast articles," then use the pull-down menu to pick the month and year), I predicted a recession in late 2007 or early 2008.
The tools I used to make this call were the behavioral patterns of three economic indicators that have proven to be generally reliable predictors of recessions: the Chicago Purchasing Managers' Index, the Leading Economic Indicators index on a year-over-year basis, and the spread between the two- and ten-year Treasury note yields. All three signs pointed to a recession six to 12 months hence.
Now, we have not yet met the traditional definition of a recession, defined by the National Bureau of Economic Research (NBER) as two or more consecutive quarters of negative GDP growth. But the last recession, in 2001, didn't even meet that definition, even though the NBER recognized it as a recession.
And many economists - including yours truly - believe the NBER definition is useless, as it means a recession can only be identified in hindsight. It's like driving a car on a mountain road, with tight curves and steep drop-offs, navigating with nothing but your rear-view mirror.
And many economists are now saying we've been in a functional recession since the first quarter.
May, 2007. I followed up with another MarketCast article whose title was taken from a famous quote by then-President George H.W. Bush: "As Housing Goes, So Goes the Economy?" In that piece, I used the historical relationship between the National Association of Home Builders (NAHB) sentiment index and the S&P 500 (as a proxy for the health of the economy) to predict a recession, and a downturn in the stock market.
A steep one.
The correlation between the NAHB index and the S&P, lagged about 18 months (the idea being that housing downturns lead economic contractions by about that length of time) is quite high - over 83% at the time I wrote the article. Also at that time, the NAHB index appeared to have begun to turn up. So on that basis, I predicted we'd see the S&P start dropping, and fall for about 18 months, which would have put the bottom at about November of this year. I called for a "sharp correction," but stopped short of pegging the S&P's ultimate low at the point suggested by the trend.
That low was 600. The S&P closed at 899 Friday, and traded below 840.
But, the NAHB index did not continue rising. It fell further, and sharply. At the time of the article's publication, the latest reading was around 40, after it had hit a bottom of 30 a few months earlier. It ultimately fell as low as 16, just a couple months ago. Then it ticked up to 18 last month.
It's due out next week, and is forecast to have fallen back down to 17. In other words, we may not have seen the bottom yet. Even if we have, though, the bottom in the S&P is likely about 16 months from now. I don't want to think about the level.
December, 2007. I wrote a follow-up piece titled, "Recession Indicators Revisited." In it, I noted that there had been significant fluctuation in the Chicago Purchasing Managers' Index, thus the signal was not entirely clear. But I noted that the only support for the factory sector in 2007 had been foreign demand for US exports, which were cheap due to the dollar's weakness versus most foreign currencies, as economies abroad were, at the time, relatively healthy.
I maintained my LEI year-over-year prediction, and I noted that the duration of the most recent yield curve inversion might lengthen the time between the two-year/ten-year spread reaching a positive 50 basis points (half a percent) and the onset of recession. And I noted the reversal of fortunes for the NAHB index.
I also added this warning:
"[T]he domestic economy has been sustained to some degree this time by a more global economy. That latter point has resulted in strong foreign demand from robust economies abroad that have sustained output in the U.S., owing in large part to the ever-weakening dollar. But some of those economies are at fragile points themselves, and several have their own mounting housing crises. We've seen the spread of the U.S. housing contagion overseas; it'll be that much worse when other countries' housing slumps hit full bloom. And the worst isn't yet over for our own housing market."
Finally, I addressed the Dow Theory, which holds that holds that a bearish trend in the Transportation Index, accompanied by the testing of a recent low in the Industrials, indicates the beginning of a full-fledged bear market in the Industrial Average. I noted that those conditions had been met in November, signaling a bear market may be underway.
Of course, we now know the market peaked in October, and now easily meets the definition of a bear market.
I've also given numerous presentations over the last year where I predicted housing would not recover before 2010; that credit market conditions would become dire; that the more the government intervened, the worse things would get; and that we could face a prolonged and painful downturn - by "prolonged and painful" I mean something akin to Japan's "Lost Decade," or, with sufficient government monkeying, a depression. Some of this doom and gloom you've read here.
A quick recap of some other, recent warnings:
1. A week before Labor Day, I predicted Fannie and Freddie would fail by the holiday. Missed that one by six days.
2. On Friday, September 12, I predicted that Lehman would go belly-up or be rescued the following Monday. Nailed that one. I also predicted that WaMu was toast. The toast was done two weeks later.
3. In our firm's quarterly economic outlook contest, my predictions for the third quarter were the most dire that I or anyone else in the company had ever made.
They were also the most accurate since we've been doing the forecast.
4. I should also point out that I bailed out of stocks in my daughter's 529 plan last October, and in the rest of our accounts in March. We even went short the market in my wife's IRA, which is up a healthy 60% since then - and that's not annualized.
Now, I'd like to turn my attention to a brief (for me) overview of what's to come - and these things are not yet fully priced into stocks.
Manufacturing
As I noted, the factory sector, normally a casualty of an economic downturn, remained resilient through 2007 and the first half of 2008 due to the weak dollar and strong foreign demand. But my prediction that foreign economies would soon weaken has come true, in spades. Heck, the entire nation of Iceland may go bankrupt, and take much of the British banking system with it.
The result of the rapid weakening of foreign demand has been a most unwelcome inventory bulge in US factories and businesses. That's evident in the Wholesale and Business Inventories series, both of which were still rising at last check. But these data series lag, so "last check" in this case is August.
More recent evidence is available from the regional Fed banks' survey-based manufacturing indices, plus the Chicago Purchasing Managers' Index noted above, and the national Institute for Supply Management Index. These measures are coincident, meaning the data is released during the month for which it reports. We'll see the first of these numbers for October next week, for example. And the forecasts are gloomy.
But - more important - beginning in September we started to see the inventory components of those measures come down. Way down. How do factories reduce inventory overhangs, when nobody's buying anymore?
1. Slash prices, which hurts profits.
2. Slash production, which idles workers.
Both measures result in layoffs.
So here's the factory sector outlook: a sharp contraction in the fourth quarter, and weakness throughout 2009, and at least until both domestic and global economies gain strength. Which could be quite a while.
Retail
Retailers are bracing for a dismal holiday season. Consumer credit actually contracted - meaning people paid off more than they borrowed - for the first time in more than a decade in August, posting the sharpest drop ever.
Why is that significant? Three reasons. First, August is back-to-school shopping month, the penultimate month in the retailer's season. Second, August saw a spike in auto sales due to deep end-of-model-year discounting. Absent the auto lending that took place in August, how much more would credit have contracted? And third, August pre-dated the current "credit freeze" everyone's screeching about.
Look for retailers' fourth-quarter numbers to be down. Way down. And look for major retrenchment in the sector after year-end.
Employment
One of my predictions throughout the first quarter of 2007 was that we'd see jobless claims begin to trend higher in the second quarter. I was wrong. I missed it by a quarter. Claims began trending upward in July, with the pace accelerating in November, then going vertical of late. The US economy has suffered net job losses every month this year, and the total loss is around 800,000 jobs.
That's about half what we'll lose next year.
Part of the reason for that is the continued decline in the financial sector and construction. Part of it is that companies that have been able to hang on by just letting attrition run its course and freezing new hires, will have to start cutting. That hasn't been widespread yet. It will be in 2009. And part of it is that the previously resilient factory and retail sectors will, as noted above, slow sharply.
Housing
The correction is not done yet. The bottom hasn't arrived. Inventories are still too high. And now the negative wealth effect from stocks' decline is sidelining more would-be buyers, which will prolong the downturn.
And, starting in 2010, we're going to see the beginnings of a non-bubble-related, systematic housing correction, one that has to do with the aging of the Baby Boomers and their reduced demand for housing, with fewer Gen X, Y, Z, Millennials, and whoever else is coming up the ranks to fill those vacated homes.
Stocks panicked last week, primarily over the "credit freeze," and lawmakers' impotence in staving off a recession, which market participants should know is impossible. So in essence, we've begun, finally, to price a recession into stocks.
But we have yet to price in the earnings numbers we're going to see from the factory sector for the fourth quarter, and the outlooks they'll print for 2009. We have yet to see the retailers' holiday numbers, or their 2009 guidance. We have yet to see the labor trends. And we have yet to see the bottom in housing, or the end of bank failures.
None of that is priced into the market. So when those things come to realization, the market will go down further.
Tomorrow, we'll take a look at the consequences of excess and leverage, and why government should stop the madness and just leave the markets alone.
Thursday, October 9, 2008
What You Permit, You Promote
Since hearing a parenting expert utter that phrase on the radio, my wife has had the saying prominently posted on our refrigerator.
And, as she noted today, it applies as equally to managing or regulating a business as it does to raising a child.
Yesterday I commented on the fact that AIG, having received a bailout in the form of an $85 billion loan from the Fed, celebrated by holding a $440,000 boondoggle at a posh resort, including $23,000 worth of spa treatments. (Okay, not really; they already had the event planned, but they still lacked the judgment to cancel it. Or at least cut back on the perks.)
Late yesterday, after the market closed, I watched in disbelief as Bubblevision announced the Fed's reaction to learning of its new beneficiary's spendthrift ways:
They loaned AIG an additional $37 billion.
Let's put this in parenting terms. Your kid gets a job mowing lawns - very enterprising. But he doesn't maintain his lawnmower, and he squanders his money on video games and thus can't buy gas, let alone pay to fix the machine.
So you give him money to fix it, and the first thing he does is go out and buy more video games. When he brings them home, you give him more money to fix the mower and buy gas.
What you permit, you promote.
So what news did we get this morning?
Junior was headed to the video game store again.
Yes, AIG's execs announced they had another boondoggle planned next week at the posh Ritz-Carlton resort at Half Moon Bay in California. (At least they're doing their part to stimulate the beleaguered California economy. Maybe Arnold won't need that $7 billion loan from Paulson after all.)
The highlight of the Bloomberg story about the planned second junket was this gem:
"AIG considered buying advertisements to explain its position, only to be told by its public-relations consultant, George Sard, that it would be 'a really bad idea.'"
No kidding.
Sard went on: "To spend the taxpayer's money on an expensive ad campaign to apologize for how you used taxpayer money leaves you open to further attacks."
Forget the boondoggles or the proposed ad campaign. That the guys in charge at AIG have to hire a PR consultant - using taxpayer money - to explain this to them is wretched excess enough. They should be summarily canned, not for the boondoggles, but for not being smart enough to run a business.
Later this morning, the upcoming conference was canceled "after a re-evaluation of the costs under the new circumstances." AIG's CEO told Hank Paulson yesterday that management would "rethink expenses," according to Bloomberg. But apparently it took the backlash from this morning's annouced second boondoggle to make them think hard enough to make a good decision. Sheesh.
This is also an object lesson in government intervention, and why it is always, always wrong.
Part of AIG's problem all along - as with the other institutions that find themselves on the brink of failure these days - is that they spent too lavishly. To cover the spending, they took on too much risk. They made money off a bubble. Times were good. So they spent even more.
Then the bubble burst.
But they didn't stop spending. Had we not bailed them out, they'd have either failed, in which case the lavish over-spending would have stopped, or they'd have been forced to slash spending to survive. Either way, the bad behavior ends.
However, when we bailed them out, they continued their errant ways, then we gave them more money, so they saw no reason to change their behavior. Until they got spanked for it.
What you permit, you promote.
That's why you have to let poorly-run businesses, who've taken excessive risks and ignored prudent expense management, to fail. Just as you'd let your kid fail if he was being irresponsible. (Okay, in some instances you'd bail your kid out. But you love your kid. You don't "love" a company.)
On a related note, sometimes intervening isn't the right thing to do because it doesn't address the root problem. Let's use another parenting analogy. Your kid develops a thyroid problem and begins to gain weight. You think it's because he must be eating too much, so you starve him, and he gets really, really sick.
That's somewhat similar to the short-selling ban that the SEC extended three days past the passage of the bailout bill. Their "thinking" was that it was short-sellers that were driving down the stock prices of the financials, threatening their failure.
The ban expired at midnight last night, so the short sellers were back in the market today.
In the three trading days that the ban was in effect, the Dow shed about 1,500 points. So with the short sellers out of the market, stocks tanked.
Today, the Dow is down again, but by the least amount since the bailout was passed, at least as of mid-afternoon.
Gee, with the short sellers back in the market, you'd think it would be down a million points.
Short sellers did not cause bank stocks to tank. Crappy balance sheets full of still-overvalued crappy securities caused bank stocks to tank.
************
A couple of random thoughts for the day. Britain's bank bailout will entail the UK government buying equity stakes in banks, effectively infusing them with much-needed capital to make loans. Instead of just buying their crappy bonds at prices above market value and sticking taxpayers with the losses when they sell them.
Sound like a better plan than ours? Hank Paulson thinks so, too. He announced this morning that that is exactly what he's going to do with at least part of the bailout money.
This guy is running around like a chicken with its head cut off, without the foggiest notion what to do about this mess or how much it'll cost. Then, when somebody else does it right, he sees the light, and copies them.
He should be fired. Now. Let Britain's Exchequer run the US Treasury Department too. He's apparently a pretty smart guy.
So a friend of mine who's a private wealth manager, hearing the news that the US taxpayer will now be buying into the banking sector, e-mailed me and said that he's been trying to keep his clients out of bank stocks all year, and now his efforts have proven futile.
The other thought for the day is a grim one. I've said before that we're in uncharted waters. Never in my life have I seen or heard things like the comment a while back from S&P that if the government keeps taking on debt, it might have to review the credit ratings on US Treasuries.
Speaking of that, I also saw last night that the Treasury is going to revive some of the maturities that were retired back when we were running a surplus. I think the specific headline on the news ticker was something like "Treasury to bring back certain security structures to address borrowing needs."
What does that obtuse statement mean?
It means they don't think there's enough demand for the current line-up of three-, six-, and twelve-month bills, two-, five-, and ten-year notes, and 30-year bonds to entice enough buyers for all the debt the US is going to have to take on to fund all these bailouts. So they're throwing the kitchen sink at the market, hoping they'll bring some more buyers out of the woodwork.
Oh, they will. But at much higher interest rates. Risk is being priced appropriately these days, for the first time in a very long time. And the US as a nation is becoming an increasingly risky investment. Looking more like subprime every day, in fact. Could somebody with a 90% debt-to-income ratio get a loan today? Of course they couldn't. So how does the US government expect to?
Final thought along these "I never thought I'd hear this" lines. An article from Reuters today led with this ominous line (emphasis added):
"The United States moved closer to taking equity stakes in banks on Thursday ahead of a G7 meeting of economic powers trying to stave off world financial ruin."
And, as she noted today, it applies as equally to managing or regulating a business as it does to raising a child.
Yesterday I commented on the fact that AIG, having received a bailout in the form of an $85 billion loan from the Fed, celebrated by holding a $440,000 boondoggle at a posh resort, including $23,000 worth of spa treatments. (Okay, not really; they already had the event planned, but they still lacked the judgment to cancel it. Or at least cut back on the perks.)
Late yesterday, after the market closed, I watched in disbelief as Bubblevision announced the Fed's reaction to learning of its new beneficiary's spendthrift ways:
They loaned AIG an additional $37 billion.
Let's put this in parenting terms. Your kid gets a job mowing lawns - very enterprising. But he doesn't maintain his lawnmower, and he squanders his money on video games and thus can't buy gas, let alone pay to fix the machine.
So you give him money to fix it, and the first thing he does is go out and buy more video games. When he brings them home, you give him more money to fix the mower and buy gas.
What you permit, you promote.
So what news did we get this morning?
Junior was headed to the video game store again.
Yes, AIG's execs announced they had another boondoggle planned next week at the posh Ritz-Carlton resort at Half Moon Bay in California. (At least they're doing their part to stimulate the beleaguered California economy. Maybe Arnold won't need that $7 billion loan from Paulson after all.)
The highlight of the Bloomberg story about the planned second junket was this gem:
"AIG considered buying advertisements to explain its position, only to be told by its public-relations consultant, George Sard, that it would be 'a really bad idea.'"
No kidding.
Sard went on: "To spend the taxpayer's money on an expensive ad campaign to apologize for how you used taxpayer money leaves you open to further attacks."
Forget the boondoggles or the proposed ad campaign. That the guys in charge at AIG have to hire a PR consultant - using taxpayer money - to explain this to them is wretched excess enough. They should be summarily canned, not for the boondoggles, but for not being smart enough to run a business.
Later this morning, the upcoming conference was canceled "after a re-evaluation of the costs under the new circumstances." AIG's CEO told Hank Paulson yesterday that management would "rethink expenses," according to Bloomberg. But apparently it took the backlash from this morning's annouced second boondoggle to make them think hard enough to make a good decision. Sheesh.
This is also an object lesson in government intervention, and why it is always, always wrong.
Part of AIG's problem all along - as with the other institutions that find themselves on the brink of failure these days - is that they spent too lavishly. To cover the spending, they took on too much risk. They made money off a bubble. Times were good. So they spent even more.
Then the bubble burst.
But they didn't stop spending. Had we not bailed them out, they'd have either failed, in which case the lavish over-spending would have stopped, or they'd have been forced to slash spending to survive. Either way, the bad behavior ends.
However, when we bailed them out, they continued their errant ways, then we gave them more money, so they saw no reason to change their behavior. Until they got spanked for it.
What you permit, you promote.
That's why you have to let poorly-run businesses, who've taken excessive risks and ignored prudent expense management, to fail. Just as you'd let your kid fail if he was being irresponsible. (Okay, in some instances you'd bail your kid out. But you love your kid. You don't "love" a company.)
On a related note, sometimes intervening isn't the right thing to do because it doesn't address the root problem. Let's use another parenting analogy. Your kid develops a thyroid problem and begins to gain weight. You think it's because he must be eating too much, so you starve him, and he gets really, really sick.
That's somewhat similar to the short-selling ban that the SEC extended three days past the passage of the bailout bill. Their "thinking" was that it was short-sellers that were driving down the stock prices of the financials, threatening their failure.
The ban expired at midnight last night, so the short sellers were back in the market today.
In the three trading days that the ban was in effect, the Dow shed about 1,500 points. So with the short sellers out of the market, stocks tanked.
Today, the Dow is down again, but by the least amount since the bailout was passed, at least as of mid-afternoon.
Gee, with the short sellers back in the market, you'd think it would be down a million points.
Short sellers did not cause bank stocks to tank. Crappy balance sheets full of still-overvalued crappy securities caused bank stocks to tank.
************
A couple of random thoughts for the day. Britain's bank bailout will entail the UK government buying equity stakes in banks, effectively infusing them with much-needed capital to make loans. Instead of just buying their crappy bonds at prices above market value and sticking taxpayers with the losses when they sell them.
Sound like a better plan than ours? Hank Paulson thinks so, too. He announced this morning that that is exactly what he's going to do with at least part of the bailout money.
This guy is running around like a chicken with its head cut off, without the foggiest notion what to do about this mess or how much it'll cost. Then, when somebody else does it right, he sees the light, and copies them.
He should be fired. Now. Let Britain's Exchequer run the US Treasury Department too. He's apparently a pretty smart guy.
So a friend of mine who's a private wealth manager, hearing the news that the US taxpayer will now be buying into the banking sector, e-mailed me and said that he's been trying to keep his clients out of bank stocks all year, and now his efforts have proven futile.
The other thought for the day is a grim one. I've said before that we're in uncharted waters. Never in my life have I seen or heard things like the comment a while back from S&P that if the government keeps taking on debt, it might have to review the credit ratings on US Treasuries.
Speaking of that, I also saw last night that the Treasury is going to revive some of the maturities that were retired back when we were running a surplus. I think the specific headline on the news ticker was something like "Treasury to bring back certain security structures to address borrowing needs."
What does that obtuse statement mean?
It means they don't think there's enough demand for the current line-up of three-, six-, and twelve-month bills, two-, five-, and ten-year notes, and 30-year bonds to entice enough buyers for all the debt the US is going to have to take on to fund all these bailouts. So they're throwing the kitchen sink at the market, hoping they'll bring some more buyers out of the woodwork.
Oh, they will. But at much higher interest rates. Risk is being priced appropriately these days, for the first time in a very long time. And the US as a nation is becoming an increasingly risky investment. Looking more like subprime every day, in fact. Could somebody with a 90% debt-to-income ratio get a loan today? Of course they couldn't. So how does the US government expect to?
Final thought along these "I never thought I'd hear this" lines. An article from Reuters today led with this ominous line (emphasis added):
"The United States moved closer to taking equity stakes in banks on Thursday ahead of a G7 meeting of economic powers trying to stave off world financial ruin."
Wednesday, October 8, 2008
The Second Debate
I don't know who won the second presidential debate, and I don't care. "Winning" a debate is like two football teams squaring off, and running some plays, but without actually using a football, and never crossing the goal line or kicking a field goal - then letting the fans judge subjectively which team they think won, and taking a vote.
You know how that game would work: the fans of Team A would say their team won; Team B's fans would say Team B won. Whichever team had the most fans respond to the poll would win. As I posted once before, those predisposed ...
Anyway, I did read the transcript. So I missed out on the body language, the eye contact, and Barack Obama's winning smile. (Chris Matthews was fawning over Obama's smile last night, contrasting to McCain's smile, which apparently he doesn't like as well as Obama's. I swear, the way Matthews fawns over other guys worries me.)
And reading the transcript, I've come to the conclusion that neither of these guys should be our next president.
Here's the rationale: we are in an economic firestorm of near-Biblical proportions, and if it's handled improperly, it could spell doom for the US economy. The very fact that it's being handled by government at all pegs the odds at more than 50% that it'll be handled improperly.
And neither of these guys' plans would do anything but further damage.
(Oh, I know, it's rare that a politician delivers on his promised plans. But given the stakes at this table, I don't want to play the odds that they'll abandon their frighteningly bad ideas in favor of something that actually makes sense.)
Here's what's on Obama's flip chart:
1. Cut taxes for the middle class, which he defines as anyone making less than $200,000 a year.
2. Get back the $440,000 that AIG spent on their corporate boondoggle after they got an $85 billion government bailout (makes sense, until you realize that the taxpayers now own AIG, so we'd be paying ourselves back).
3. Provide help to homeowners so they can stay in their homes (yes, including the ones that lied about their incomes, put no money down, or can't afford their mortgage payment whether it's $2,000 a month or $1,000, presumably).
4. Help state and local governments set up road projects and bridge projects to keep people in their jobs (if those people are already in state and local government jobs and there are no road projects or bridge projects to keep them busy, no wonder state and local governments are bleeding red ink).
5. Fix our health care system.
6. Fix our energy system.
7. Raise taxes only for those who make more than $250,000 a year.
Noble concepts, all. But you do the math. You're going to have to tax those people at a rate of, oh, say about 100% to pay for all that stuff. Obama acknowledged that he was proposing some fairly healthy spending boosts - $860 billion, according to McCain - but that he planned to cut more than he was proposing to spend, so that he'd be a net spending-cutter.
But he failed to name one thing he'd cut.
On to McCain's slate:
1. Buy up all the bad mortgages in the country, which he says can be done for $300 billion, which he would divert out of the recent bailout. He would then refinance those people into mortgages with balances equal to the value of the home.
Let's spend a little more time with this one.
The US mortgage market is $11 trillion, and the mortgage delinquency rate is at 6.41% - a record, by the way. So the total of all "bad mortgages" in this country is $705 billion. Home values are down nationwide about 18%, so you'd assume that would be the hickey the taxpayer would take.
But 18% of $705 billion is $126 billion, not $300 billion. Maybe he's assuming that more people will go delinquent on their homes - which they will; heck, in fact, now that he's announced this plan, everybody who's upside-down in their homes should immediately stop making their mortgage payments. Maybe he's assuming home prices will decline further, which they will - approximately 10-15% according to most pundits.
Or maybe he's assuming that anything the government does will wind up costing more than twice what it actually should. Which is also accurate, unfortunately.
One thing he's ignoring is the unconscionable moral hazard of rewarding financially irresponsible behavior. Another thing he's ignoring is that most mortgages are delinquent because the borrower can't make the monthly payment whether it's $2,000 a month or $1,000.
And a final thing he's ignoring is that he won't have a chance to divert money from the bailout, because by the time the next president is inaugurated, Paulson will have spent it. At least once.
2. Either cut or freeze everybody's taxes - I'm not sure which.
Not a very lengthy list, compared to Obama's. But since Obama's list is pretty much all outflow and little inflow, that may be a good thing. But only relatively. McCain's ideas would also put us further in the red than we already are. And today we learned that the deficit for fiscal 2008 is a new record - woo-hoo!
There were other silly moments, like when McCain said Fannie and Freddie started the whole credit crisis. They contributed mightily, but they did not start it, as any reader of this space should know by now. Or when Obama said that when Bush took office, the national debt was $5 trillion, and now it's more than $10 trillion, then said it had "almost doubled." Last I checked, "more than ten" is MORE than double 5, not "almost double."
But besides neither of them having the first foggy clue as to what actually caused the crisis we're in, or what to do about it, they also provided another scare.
When asked who they'd appoint as Treasury Secretary, they both named Warren Buffett. McCain also named former e-Bay CEO Meg Whitman. Neither would be a good choice.
The Oracle from Omaha is a very smart guy, a very savvy investor. But he lets his politics cloud his judgment. He's a big-government guy. He apparently doesn't believe in free markets.
Because he was in favor of the bailout. And that's the cardinal sin with me these days.
I can see not going back to Wall Street for the next Treasury chief, given the experience with Paulson and his bailout for his cronies. Although Bob Rubin wasn't bad.
But I'd pick somebody tough, old-school, hardscrabble, somebody who understands free markets and doesn't think it's the government's job to prop up the price of every bubbly over-inflated asset that exists. I don't know who that is. Me, but I wouldn't take the job. Maybe Ron Paul.
And I also believe Bernanke's got to go. So does none other than NYU economist Nouriel Roubini, who's called this thing with terrifying accuracy from the get-go. My pick would be either Roubini himself, or Paul Volcker.
But the sad truth is, it's easier for me to pick who the next Fed Chair or Treasury Secretary should be, than who the next president should be. But then, in the case of the latter decision, my options are tragically limited.
A final thought. Are we surprised that the AIG execs took their bailout money and went on a junket? If we are, shame on us. Remember the RTC, the agency that was created to clean up the S&L crisis (yes, the same agency that exacerbated it and doubled its cost)? The local office of the RTC, it was reported in the Kansas City Star, had more than $26,000 worth of original art hanging in it, that the regional director had bought. And it wasn't a huge office suite. The Star quipped, "He put the 'art' in 'RTC.'"
He said he did it to boost morale, because the job of cleaning up sick thrifts was so depressing.
I worked for one of those thrifts, only it wasn't even sick when the OTS took "preemptive" action and took it over. But it sure got sick fast, and wound up costing the taxpayers money, due to the RTC's mismanagement of the unwinding of the portfolio while it was in "conservatorship."
Don't believe me? Sour grapes on my part? How about this: on one conference call, the guy the RTC put in charge of the institution - at the time the 16th-largest S&L in the country - we were discussing some zero-coupon bonds. We kept referring to them as "the zeroes." About a half hour into the call, the guy asks:
"What's the coupon on these, anyway?"
I didn't notice any bad morale among those guys. Especially when they shut down all of our local office space except their own little suite, and shipped us all out on a 90-mile daily round-trip commute. Or when they left at noon every Friday for the weekend.
I walked away from that place after four years, my retirement funds - virtually entirely in a company stock plan, which the RTC quit funding when they stepped in. After four years' work, I walked away with about $400 saved for retirement.
I cashed out, took the tax hit and the penalty, and drank it.
You want bad morale? I got yer bad morale right here, sport.
Oh, as for AIG. How did our government respond to the news that its execs spend $440,000 of their bailout money on a boondoggle retreat?
Tonight, the Fed announced it would provide another $37 billion in funding, on top of the $85 billion bailout.
And the government actually tried to tell us we'd make money on the AIG deal.
As Charlie Brown used to say (banging his head into a tree, as I'm going to go outside and do right now), "I can't stand it."
You know how that game would work: the fans of Team A would say their team won; Team B's fans would say Team B won. Whichever team had the most fans respond to the poll would win. As I posted once before, those predisposed ...
Anyway, I did read the transcript. So I missed out on the body language, the eye contact, and Barack Obama's winning smile. (Chris Matthews was fawning over Obama's smile last night, contrasting to McCain's smile, which apparently he doesn't like as well as Obama's. I swear, the way Matthews fawns over other guys worries me.)
And reading the transcript, I've come to the conclusion that neither of these guys should be our next president.
Here's the rationale: we are in an economic firestorm of near-Biblical proportions, and if it's handled improperly, it could spell doom for the US economy. The very fact that it's being handled by government at all pegs the odds at more than 50% that it'll be handled improperly.
And neither of these guys' plans would do anything but further damage.
(Oh, I know, it's rare that a politician delivers on his promised plans. But given the stakes at this table, I don't want to play the odds that they'll abandon their frighteningly bad ideas in favor of something that actually makes sense.)
Here's what's on Obama's flip chart:
1. Cut taxes for the middle class, which he defines as anyone making less than $200,000 a year.
2. Get back the $440,000 that AIG spent on their corporate boondoggle after they got an $85 billion government bailout (makes sense, until you realize that the taxpayers now own AIG, so we'd be paying ourselves back).
3. Provide help to homeowners so they can stay in their homes (yes, including the ones that lied about their incomes, put no money down, or can't afford their mortgage payment whether it's $2,000 a month or $1,000, presumably).
4. Help state and local governments set up road projects and bridge projects to keep people in their jobs (if those people are already in state and local government jobs and there are no road projects or bridge projects to keep them busy, no wonder state and local governments are bleeding red ink).
5. Fix our health care system.
6. Fix our energy system.
7. Raise taxes only for those who make more than $250,000 a year.
Noble concepts, all. But you do the math. You're going to have to tax those people at a rate of, oh, say about 100% to pay for all that stuff. Obama acknowledged that he was proposing some fairly healthy spending boosts - $860 billion, according to McCain - but that he planned to cut more than he was proposing to spend, so that he'd be a net spending-cutter.
But he failed to name one thing he'd cut.
On to McCain's slate:
1. Buy up all the bad mortgages in the country, which he says can be done for $300 billion, which he would divert out of the recent bailout. He would then refinance those people into mortgages with balances equal to the value of the home.
Let's spend a little more time with this one.
The US mortgage market is $11 trillion, and the mortgage delinquency rate is at 6.41% - a record, by the way. So the total of all "bad mortgages" in this country is $705 billion. Home values are down nationwide about 18%, so you'd assume that would be the hickey the taxpayer would take.
But 18% of $705 billion is $126 billion, not $300 billion. Maybe he's assuming that more people will go delinquent on their homes - which they will; heck, in fact, now that he's announced this plan, everybody who's upside-down in their homes should immediately stop making their mortgage payments. Maybe he's assuming home prices will decline further, which they will - approximately 10-15% according to most pundits.
Or maybe he's assuming that anything the government does will wind up costing more than twice what it actually should. Which is also accurate, unfortunately.
One thing he's ignoring is the unconscionable moral hazard of rewarding financially irresponsible behavior. Another thing he's ignoring is that most mortgages are delinquent because the borrower can't make the monthly payment whether it's $2,000 a month or $1,000.
And a final thing he's ignoring is that he won't have a chance to divert money from the bailout, because by the time the next president is inaugurated, Paulson will have spent it. At least once.
2. Either cut or freeze everybody's taxes - I'm not sure which.
Not a very lengthy list, compared to Obama's. But since Obama's list is pretty much all outflow and little inflow, that may be a good thing. But only relatively. McCain's ideas would also put us further in the red than we already are. And today we learned that the deficit for fiscal 2008 is a new record - woo-hoo!
There were other silly moments, like when McCain said Fannie and Freddie started the whole credit crisis. They contributed mightily, but they did not start it, as any reader of this space should know by now. Or when Obama said that when Bush took office, the national debt was $5 trillion, and now it's more than $10 trillion, then said it had "almost doubled." Last I checked, "more than ten" is MORE than double 5, not "almost double."
But besides neither of them having the first foggy clue as to what actually caused the crisis we're in, or what to do about it, they also provided another scare.
When asked who they'd appoint as Treasury Secretary, they both named Warren Buffett. McCain also named former e-Bay CEO Meg Whitman. Neither would be a good choice.
The Oracle from Omaha is a very smart guy, a very savvy investor. But he lets his politics cloud his judgment. He's a big-government guy. He apparently doesn't believe in free markets.
Because he was in favor of the bailout. And that's the cardinal sin with me these days.
I can see not going back to Wall Street for the next Treasury chief, given the experience with Paulson and his bailout for his cronies. Although Bob Rubin wasn't bad.
But I'd pick somebody tough, old-school, hardscrabble, somebody who understands free markets and doesn't think it's the government's job to prop up the price of every bubbly over-inflated asset that exists. I don't know who that is. Me, but I wouldn't take the job. Maybe Ron Paul.
And I also believe Bernanke's got to go. So does none other than NYU economist Nouriel Roubini, who's called this thing with terrifying accuracy from the get-go. My pick would be either Roubini himself, or Paul Volcker.
But the sad truth is, it's easier for me to pick who the next Fed Chair or Treasury Secretary should be, than who the next president should be. But then, in the case of the latter decision, my options are tragically limited.
A final thought. Are we surprised that the AIG execs took their bailout money and went on a junket? If we are, shame on us. Remember the RTC, the agency that was created to clean up the S&L crisis (yes, the same agency that exacerbated it and doubled its cost)? The local office of the RTC, it was reported in the Kansas City Star, had more than $26,000 worth of original art hanging in it, that the regional director had bought. And it wasn't a huge office suite. The Star quipped, "He put the 'art' in 'RTC.'"
He said he did it to boost morale, because the job of cleaning up sick thrifts was so depressing.
I worked for one of those thrifts, only it wasn't even sick when the OTS took "preemptive" action and took it over. But it sure got sick fast, and wound up costing the taxpayers money, due to the RTC's mismanagement of the unwinding of the portfolio while it was in "conservatorship."
Don't believe me? Sour grapes on my part? How about this: on one conference call, the guy the RTC put in charge of the institution - at the time the 16th-largest S&L in the country - we were discussing some zero-coupon bonds. We kept referring to them as "the zeroes." About a half hour into the call, the guy asks:
"What's the coupon on these, anyway?"
I didn't notice any bad morale among those guys. Especially when they shut down all of our local office space except their own little suite, and shipped us all out on a 90-mile daily round-trip commute. Or when they left at noon every Friday for the weekend.
I walked away from that place after four years, my retirement funds - virtually entirely in a company stock plan, which the RTC quit funding when they stepped in. After four years' work, I walked away with about $400 saved for retirement.
I cashed out, took the tax hit and the penalty, and drank it.
You want bad morale? I got yer bad morale right here, sport.
Oh, as for AIG. How did our government respond to the news that its execs spend $440,000 of their bailout money on a boondoggle retreat?
Tonight, the Fed announced it would provide another $37 billion in funding, on top of the $85 billion bailout.
And the government actually tried to tell us we'd make money on the AIG deal.
As Charlie Brown used to say (banging his head into a tree, as I'm going to go outside and do right now), "I can't stand it."
Tuesday, October 7, 2008
Finding the Bottom
Wanted to get this in before the market opens Wednesday. Unlike yesterday's session, which ended with a pull-back from the day's lows in the final hour of trading, today we closed on the lows. The technical guys would predict, on that basis, that we'll get a rally tomorrow.
Could be. But it'll be a dead-cat bounce. This thing isn't over yet.
And if Bernanke follows through on his hint today and cuts the funds target, we will most certainly get a rally. But that, too, will be a dead-cat bounce. It should already be priced into stocks - after all, it's fully priced into bonds and Fed funds futures: the three-month T-bill yield is 76 basis points, down almost a point from a month ago, and the implied probability from the funds futures market calls for a two-thirds chance of a 50 basis point cut in the funds target by the next FOMC meeting, at the end of this month, and a one-third chance of a 75 basis point cut.
(A quick pat on the back - the funds futures bet looks dramatically different from that of a month ago, when there was a 98% implied chance of no change and a 2% chance of a hike; the chances of a hike were even higher a few weeks before that. Astute readers will recall that on Thursday, August 7, I made a post in this space arguing that the Fed would not raise rates to fight inflation, as was widely expected at the time, and that its next move would be a cut.)
Well, with the heavy selling we have everybody on CNBC (another blogger calls it "Bubblevision" - I like that) and all over the finance websites like Yahoo Finance saying we're near the bottom.
Balderdash.
For one thing, this market has yet to price in a recession. But it is coming. It will hit manufacturing and retailing particularly hard in the fourth quarter. And it will last well into next year, at least. The market may be in the initial stages of pricing one in, but it hasn't gone deep enough yet.
For another thing, it hasn't priced in the likelihood of a big hike in the capital gains tax if Obama wins, which appears increasingly likely. (Note to Obama supporters: stand down. I am not insulting your candidate. He said he'd raise the tax himself, I'm just quoting him. And for the record, I am equally disgusted with both candidates, and with Joe Biden, after last week's Senate bailout vote. Palin gets a pass, since she's not a Senator. But she'd earn more respect from me if she came out and said she strongly disagrees with her running mate on this one.)
And it hasn't priced in a lot of other stuff that could, and likely will, happen, like the potential inflationary Armageddon that the bailout and a rate cut will produce (did anyone notice the dollar tanked today?).
In May 2007, I wrote an article noting the strong correlation between the NAHB Housing Market Index - based on a survey of homebuilders - and the S&P 500, lagged 18 months. I also noted that, at the time, the index suggested the S&P would bottom out around 600, and that this would happen around the second quarter of 2009.
I based the timing of this prediction on the fact that the NAHB index had hit its then-low of the cycle in September 2006, after peaking in June of 2005. Since it took 15 months to bottom out, my argument was that the S&P would take about the same amount of time to hit bottom, and it had just begun to fall slightly at the time of that writing.
Meanwhile, the NAHB index appeared to be on the rebound; it had risen from the low mark of 30 in September 2006 to 39 by February of 2007. (That's a reasonably significant move; to put it in perspective, the peak in mid-2005 was 72.)
Well, we know what happened to the S&P: it continued to rise until October, when the bear trend began. So what happened to the NAHB index?
In March of 2007, it resumed dropping. Like a rock. It bounced around 20 from September 2007 until about April, then fell some more. It bottomed out at 16 in June, and stayed there in July. Then it went up two points in August.
So the bottom for the S&P could be below 600 (it closed below 1,000 today), and it could come later than mid-2009.
We can know this: stocks won't recover meaningfully until housing recovers, and that won't happen until 2010. Also, during most recessions since 1970, stocks have bottomed out one-half to two-thirds of the way through the recession, defined using the NBER definition, by which we have not yet entered a recession. So, assuming the third quarter saw the first quarter of GDP contraction, and that it lasts as long as the last two recessions (I think it'll last longer, but let's just set the bar somewhere for now), the halfway point will be somewhere around year-end. So we could see a bottom then.
But don't count on it. (Slight detour: stocks bottomed about a year after the last recession ended, but that makes sense, as the stock market itself - specifically, the tech sector - largely brought about the recession. This is not a stock market-driven recession. The market is the victim this time, not the perp.)
Again, I believe this recession will last longer than the last two, something on the order of a year to a year and a half, at least. So the halfway point would likely come no sooner than next summer or fall.
As for where the bottom is level-wise, I'll just say this. Stocks grew at a nice, normal, healthy, sustainable pace throughout the '80s. Then, around 1994, things got frothy. Then downright bubbly. We got a correction in 2000-2002, then another pretty frothy run-up through the housing heyday, and now we're in another correction.
If you plot that nice, long-term-sustainable trendline through to the end of this year, you find the Dow should be at about 8,000 and the S&P at 800. Now, that ain't exactly rocket science, but it's a nice, stable, logical, rational approach to valuation. We are not in a "new economy" or a "new environment," as I've said more times than I can count since the mid-90s. And most of the talking heads on Bubblevision that say we are haven't even been in or studied the markets long enough to know better.
Could be. But it'll be a dead-cat bounce. This thing isn't over yet.
And if Bernanke follows through on his hint today and cuts the funds target, we will most certainly get a rally. But that, too, will be a dead-cat bounce. It should already be priced into stocks - after all, it's fully priced into bonds and Fed funds futures: the three-month T-bill yield is 76 basis points, down almost a point from a month ago, and the implied probability from the funds futures market calls for a two-thirds chance of a 50 basis point cut in the funds target by the next FOMC meeting, at the end of this month, and a one-third chance of a 75 basis point cut.
(A quick pat on the back - the funds futures bet looks dramatically different from that of a month ago, when there was a 98% implied chance of no change and a 2% chance of a hike; the chances of a hike were even higher a few weeks before that. Astute readers will recall that on Thursday, August 7, I made a post in this space arguing that the Fed would not raise rates to fight inflation, as was widely expected at the time, and that its next move would be a cut.)
Well, with the heavy selling we have everybody on CNBC (another blogger calls it "Bubblevision" - I like that) and all over the finance websites like Yahoo Finance saying we're near the bottom.
Balderdash.
For one thing, this market has yet to price in a recession. But it is coming. It will hit manufacturing and retailing particularly hard in the fourth quarter. And it will last well into next year, at least. The market may be in the initial stages of pricing one in, but it hasn't gone deep enough yet.
For another thing, it hasn't priced in the likelihood of a big hike in the capital gains tax if Obama wins, which appears increasingly likely. (Note to Obama supporters: stand down. I am not insulting your candidate. He said he'd raise the tax himself, I'm just quoting him. And for the record, I am equally disgusted with both candidates, and with Joe Biden, after last week's Senate bailout vote. Palin gets a pass, since she's not a Senator. But she'd earn more respect from me if she came out and said she strongly disagrees with her running mate on this one.)
And it hasn't priced in a lot of other stuff that could, and likely will, happen, like the potential inflationary Armageddon that the bailout and a rate cut will produce (did anyone notice the dollar tanked today?).
In May 2007, I wrote an article noting the strong correlation between the NAHB Housing Market Index - based on a survey of homebuilders - and the S&P 500, lagged 18 months. I also noted that, at the time, the index suggested the S&P would bottom out around 600, and that this would happen around the second quarter of 2009.
I based the timing of this prediction on the fact that the NAHB index had hit its then-low of the cycle in September 2006, after peaking in June of 2005. Since it took 15 months to bottom out, my argument was that the S&P would take about the same amount of time to hit bottom, and it had just begun to fall slightly at the time of that writing.
Meanwhile, the NAHB index appeared to be on the rebound; it had risen from the low mark of 30 in September 2006 to 39 by February of 2007. (That's a reasonably significant move; to put it in perspective, the peak in mid-2005 was 72.)
Well, we know what happened to the S&P: it continued to rise until October, when the bear trend began. So what happened to the NAHB index?
In March of 2007, it resumed dropping. Like a rock. It bounced around 20 from September 2007 until about April, then fell some more. It bottomed out at 16 in June, and stayed there in July. Then it went up two points in August.
So the bottom for the S&P could be below 600 (it closed below 1,000 today), and it could come later than mid-2009.
We can know this: stocks won't recover meaningfully until housing recovers, and that won't happen until 2010. Also, during most recessions since 1970, stocks have bottomed out one-half to two-thirds of the way through the recession, defined using the NBER definition, by which we have not yet entered a recession. So, assuming the third quarter saw the first quarter of GDP contraction, and that it lasts as long as the last two recessions (I think it'll last longer, but let's just set the bar somewhere for now), the halfway point will be somewhere around year-end. So we could see a bottom then.
But don't count on it. (Slight detour: stocks bottomed about a year after the last recession ended, but that makes sense, as the stock market itself - specifically, the tech sector - largely brought about the recession. This is not a stock market-driven recession. The market is the victim this time, not the perp.)
Again, I believe this recession will last longer than the last two, something on the order of a year to a year and a half, at least. So the halfway point would likely come no sooner than next summer or fall.
As for where the bottom is level-wise, I'll just say this. Stocks grew at a nice, normal, healthy, sustainable pace throughout the '80s. Then, around 1994, things got frothy. Then downright bubbly. We got a correction in 2000-2002, then another pretty frothy run-up through the housing heyday, and now we're in another correction.
If you plot that nice, long-term-sustainable trendline through to the end of this year, you find the Dow should be at about 8,000 and the S&P at 800. Now, that ain't exactly rocket science, but it's a nice, stable, logical, rational approach to valuation. We are not in a "new economy" or a "new environment," as I've said more times than I can count since the mid-90s. And most of the talking heads on Bubblevision that say we are haven't even been in or studied the markets long enough to know better.
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