I'm not a Trekkie, but I am Scottish, so borrowing that line seems apropos. Let's start today's post with a little game I call "Attribute the Quote."
"There is no way you can have $2.2 trillion in borrowing without influencing interest rates or inflation in the long-term. You either crowd out other borrowers or you print money. This is a crisis of excessive debt, which reached 355 percent of American gross domestic product. It cannot be solved with more debt."
Stumped? I'd have been, too. The quote came January 29 in Davos from Niall Ferguson, an economic historian. (Economic historian - now there's a fun date.) Next up:
"Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism."
The last word is something of a give-away, but it's still a bit shocking that the man was sufficiently prescient to have gotten this 142 years ago - especially since the "technology" he was referring to didn't include Wiis, iPods, HDTVs, or GPS units.
It was Karl Marx, writing his epic "Das Kapital."
Last, but not least:
"Under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth ... The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit ... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation."
A couple of my guys at work got this one, though they first guessed Hyman Minsky. The "confiscation through inflation" was too reminiscent of gems like "irrational exuberance" not to detect the intellectual double-speak of Alan "Mr. Bubble" Greenspan, who spoke those words in 1966.
Hey DJ, queue up "Losing My Religion" by REM, because Alan abandoned that kind of ordered thinking once he got his hands on the purse strings.
The bottom line is that I don't like this stimulus spending. Maybe I'd feel differently if the US actually had any money. But we don't. We're in hock up to our eyeballs, and we want to fix our economic problems by going deeper in debt.
Households and business are going through the painful process of de-leveraging. It's like a colon cleansing - painful, yes; messy, most assuredly; but necessary when you've been guilty of gluttony for too long.
But the government doesn't like it. Washington is a collective of crack-heads who've been puffing the pipe so long that all they can think of is the next fix: "We've gotta increase consumption! We've gotta get credit flowing! Banks need to lend, people need to borrow!" So, just at the time when the rest of us are cleaning the pipes, the pols are sitting down at the buffet table for another debt orgy. And like Fletch, they're going to put it on the Underhills' tab - and you and I, the US taxpayers, are the Underhills.
Fortunately, some Congresspersons get it - though I'm jaded enough at this point to believe that they're just hearing the outrage of their constituents and putting on a good game face, but when push comes to shove they'll vote this porky pig right in, just like the TARP. But I have naive hope that the groundswell of those opposed to this sucker will rise like a savior to US economic - and perhaps total - sovereignty, and we won't go the way of Marx' grave prediction.
I also know that John Q. Public hates this idea, for the most part (except those who still can't wipe off the kool-aid mustache - more on them later). And listening to those in Davos, the rest of the world hates it, too. There are increasing demands around the globe that the US demonstrate how we're going to fund all this spending, if we expect to be able to crowd out the rest of the world's funding needs, courtesy of our triple-A rating.
And to use another old Scottish line, "Aye, there's the rub, laddie."
See, even with all the spending, and with the federal debt ceiling now exceeding GDP, the ratings agencies are unlikely to downgrade US debt, as they did Greece's and Spain's. Why? Are we too big to fail?
Ominously, we are not. But Moody's and S&P are a spineless lot, and they know where their bread's buttered. They are US companies, and they will not bite the hand that kennels them. Fitch is a UK concern, though, so they might have the bollocks, as our friends across the pond say. But I'm guessing they'd shy from it too, because if they turned out to be in error, they might never see a dime of business from a US firm again. And Lord knows there's ample probability that the ratings agencies might be in error. Their collective (a word we need to get used to, comrades) performance rates them a solid "F."
No matter. China et al will do what the ratings agencies are too cowardly to do. Seeing our massive debt load, they will bid yields to appropriately price risk - believe it or not, there's more of that happening these days - and Treasuries will trade at A-ratings levels, at best, if not in the Bbb- range. And I will be happy, being short the long bond and all.
One of my compadres on the D2 football message board I frequent asked me this question:
"Hey Brian, in simple terms (if that is possible), how do you think the Obama admin is going to try to keep rates low in the face of all this debt? My guess is, they think they are going to get through the next 18-24 months 'unscathed', and hope for some miracle - maybe a huge market rally - to come to the rescue at that point. But, as you know, a spike in rates will cripple their plans for a recovery, so they must have some sort of scheme cooked up?"
I referred him to my latest blog post, where I talk about the Fed's little Ponzi scheme, then I added this:
"I don't see that Barney Fife - er, Bernanke, has more than the one bullet left in his pocket. So they'll try buying Treasuries to keep rates low, but since they'll have to print money to do it, they won't be able to stop rates from rising unless they play the scheme in such massive proportions that they totally destroy the dollar and plunge us into Weimar-esque hyperinflation. I think Bernanke understands that, which is why they're just jaw-boning at this point. Of course, it's not working.
Beyond that, the only thing they could try to do is legislate lending and savings rates, like we did before DIDMCA in 1980. But that would require us to return to the gold standard or some other representative money system - it won't work w/fiat money."
Hence the Greenspan quote - made before he lost his religion.
Friday, January 30, 2009
Thursday, January 29, 2009
A Ponzi Scheme That Makes Bernie Madoff Look Like a Piker
The Fed indicated last week that it's going to start buying long-term Treasury securities. Since it's out of room to lower rates any further, the idea is that it'll keep rates low by maintaining a strong bid for long-term Treasuries. But that's not the real reason for the plan. Here's the truth.
Treasury needs to issue a huge amount of debt securities to fund all this failout frenzy. The UK, Europe, Japan and Latin America will be doing the same thing, effectively flooding the market with bonds, all competing for the same pool of bond investors (as the investor universe will not increase, cet. par.).
At the same time, the perceived credit quality of the issuing sovereigns will decline due to the massive increase in indebtedness (see Greece and Spain). The supply and demand factor noted above, as well as the credit issue, will drive interest rates higher, making mortgages, car loans, etc. more expensive, at the worst possible time.
The Fed desires the opposite: to keep rates as low as possible. But long-term lending rates won't move with the Fed funds target, which the Fed held steady last week at 0-.25% (don't get me started on how stupid it is to use a range rather than a single rate). Those rates will instead move with market interest rates - in other words, Treasury yields, which will go up.
So the Fed will simply buy those Treasuries and hold them themselves, effectively solving the supply and demand problem, and ignoring the credit risk problem.
Am I the only person who's following which shell the ball is under?
A. Treasury issues bonds.
B. Fed buys bonds.
C. Treasury issues special bonds to fund Fed.
Lather, rinse and repeat. Hello, inflation!
It won't work, in any event - evidenced by the fact that since the FOMC meeting, the long bond yield has moved higher. And there are two other factors that will come into play as the government starts throwing trillions around (this morning I read that there's likely to be a second bank bailout, on top of the TARP, which will cost $1-2 trillion, in addition to the "economic recovery plan" whose price tag will hit a trillion before Congress is through with it - but more on those topics in a post to come).
First, all that money-printing will devalue the dollar. There aren't enough US investors to absorb all the debt (unless the Fed just buys 100% of the issuance, in which instance the half-life of the US economy is maybe a year). Foreign investors will demand higher yields on dollar-denominated assets, since they'll see the value of their dollar-denominated investments fall in terms of their own currency - except maybe the UK, but they can't afford to buy our bonds anyway. So they'll bid the yield up.
Second, China's not going to be buying our bonds anymore. Not only have they soured on the US and its macroeconomic and fiscal policies, but it has its own massive slowdown to contend with. The Chinese slowdown has been caused by global demand - particularly that in the US - going into the crapper, so they can't fuel their output by sending massive amounts of cheap money to the US to keep rates artificially low so that Americans can afford to buy all their stuff. No matter what rates do here, banks aren't lending and people aren't spending.
So the Chinese central bank rightfully figures that the best way to stimulate the Chinese economy is to keep its money at home, and invest its reserves (yes, China actually still has reserves) in its own infrastructure. Without China in the game, again, the bid weakens and yields rise.
How sure am I that in spite of the Fed's efforts, long Treasury yields will rise? On January 20 - the day stocks hit their lows of the new year, with the Dow closing below 8,000 - I cashed in half of my leveraged bets against the NASDAQ and the S&P. Two days later, I invested the proceeds in another leveraged inverse bet - this one on the 30-year Treasury bond. Thus far, the return is about 3%, which is about 160%, annualized.
Treasury needs to issue a huge amount of debt securities to fund all this failout frenzy. The UK, Europe, Japan and Latin America will be doing the same thing, effectively flooding the market with bonds, all competing for the same pool of bond investors (as the investor universe will not increase, cet. par.).
At the same time, the perceived credit quality of the issuing sovereigns will decline due to the massive increase in indebtedness (see Greece and Spain). The supply and demand factor noted above, as well as the credit issue, will drive interest rates higher, making mortgages, car loans, etc. more expensive, at the worst possible time.
The Fed desires the opposite: to keep rates as low as possible. But long-term lending rates won't move with the Fed funds target, which the Fed held steady last week at 0-.25% (don't get me started on how stupid it is to use a range rather than a single rate). Those rates will instead move with market interest rates - in other words, Treasury yields, which will go up.
So the Fed will simply buy those Treasuries and hold them themselves, effectively solving the supply and demand problem, and ignoring the credit risk problem.
Am I the only person who's following which shell the ball is under?
A. Treasury issues bonds.
B. Fed buys bonds.
C. Treasury issues special bonds to fund Fed.
Lather, rinse and repeat. Hello, inflation!
It won't work, in any event - evidenced by the fact that since the FOMC meeting, the long bond yield has moved higher. And there are two other factors that will come into play as the government starts throwing trillions around (this morning I read that there's likely to be a second bank bailout, on top of the TARP, which will cost $1-2 trillion, in addition to the "economic recovery plan" whose price tag will hit a trillion before Congress is through with it - but more on those topics in a post to come).
First, all that money-printing will devalue the dollar. There aren't enough US investors to absorb all the debt (unless the Fed just buys 100% of the issuance, in which instance the half-life of the US economy is maybe a year). Foreign investors will demand higher yields on dollar-denominated assets, since they'll see the value of their dollar-denominated investments fall in terms of their own currency - except maybe the UK, but they can't afford to buy our bonds anyway. So they'll bid the yield up.
Second, China's not going to be buying our bonds anymore. Not only have they soured on the US and its macroeconomic and fiscal policies, but it has its own massive slowdown to contend with. The Chinese slowdown has been caused by global demand - particularly that in the US - going into the crapper, so they can't fuel their output by sending massive amounts of cheap money to the US to keep rates artificially low so that Americans can afford to buy all their stuff. No matter what rates do here, banks aren't lending and people aren't spending.
So the Chinese central bank rightfully figures that the best way to stimulate the Chinese economy is to keep its money at home, and invest its reserves (yes, China actually still has reserves) in its own infrastructure. Without China in the game, again, the bid weakens and yields rise.
How sure am I that in spite of the Fed's efforts, long Treasury yields will rise? On January 20 - the day stocks hit their lows of the new year, with the Dow closing below 8,000 - I cashed in half of my leveraged bets against the NASDAQ and the S&P. Two days later, I invested the proceeds in another leveraged inverse bet - this one on the 30-year Treasury bond. Thus far, the return is about 3%, which is about 160%, annualized.
Saturday, January 24, 2009
Blessed Beyond Measure
Wow.
Okay, I know I've started posts on here with that word, so for emphasis, let me say it again, with feeling:
WOW.
I took last week off. I reach the end of each year with more vacation time left over than I can get paid for, so since our policy allows us to use last year's excess in the first quarter of this year, I thought I'd burn some. I've been wanting to get some things done - house projects (which I'm caught up on), guitar playing (which I'm woefully behind on), and sorting through pictures for our daughter's high school graduation slide show, which we'll present at the open house we have for her.
On that latter topic, I spent the week after Christmas - which I also took off work - going through all of our digital pics. I knocked that one out pretty handily.
Alas, we didn't go digital, camera-wise, until about 2003. So we have literally thousands of film pics - most with duplicates - to sort through. Rather than just cull the pictures of our daughter, we decided to create a number of categories, and sort them all. Eventually, we'll put them in albums by topic, and/or family, and/or year.
In the process of doing so, I came to a realization: I have been blessed beyond measure.
We have traveled extensively, some on our own, some owing to the fact that I've been fortunate to have been invited to speak at conferences across the nation, and beyond.
We've been to the Rockies of Colorado, and I've seen the world from the top of three 14,000-foot peaks. There is nothing on earth like that view. We've hiked through pine and aspen forests, gone rafting and fishing, and ridden alpine slides.
We've visited the Ozarks of Missouri and Arkansas, and driven their twisty roads. We've covered California, from San Diego to LA to the Temecula valley to San Francisco to Napa and Sonoma Valleys. We've viewed the coastal mountains, laid on the beach at Lake Tahoe, surrounded by forests and peaks. We've strolled the beaches of Coronado Island and Santa Monica, and visited numerous wineries. My wife and I were married in the Napa Valley in March of 1996, and the image of the vineyards with their bare vines promising the hope of a new harvest, with the brilliant yellow mustard growing between the rows of vines adding color to that promise, reminds me of the hope and promise we felt when we committed our lives to one another. And our harvest - at least mine - has been bountiful beyond my wildest dreams. If our life together were a wine, Robert Parker would have to develop a new rating scale.
We've been to Oregon - the coast and the mountains - and Washington. We've driven through forests of pines that seemed to reach to the sky, and gazed over wild rivers and beaches.
We've been to our nation's capital, with all its rich history and its monuments. We paid tribute to my Dad and my wife's Grandpa at the WWII Memorial shortly after its long-overdue completion, and we've walked dumbstruck through the Holocaust Museum, wondering at man's inhumanity to man.
We've been to New York City. We have a picture of us with the twin towers of the World Trade Center in the background and another with their conspicuous absence behind us, and we've been to Ground Zero. We've visited Ellis Island, where our ancestors first arrived on these shores. We've walked through Central Park, watched the St. Patrick's Day Parade, seen numerous Broadway shows, and just absorbed the energy of the city.
We've been to Boston, Cape Cod, Maine, Vermont, New Hampshire. We saw the Old Man of the Mountain before his face fell off, and we've seen the Maine coast and the beautiful verdant mountains of Vermont. We've walked through Boston and seen our nation's history unfolded before us. We've played on the beach on Cape Cod, gone whale-watching there, and stayed in a B&B that was also a working farm - our daughter got to help gather the morning eggs - and was a stop on the Underground Railroad.
We've been to Disney World and Disneyland, and watched our daughter graduate from Dumbo and It's A Small World (thank God for the latter), through Space Mountain and Thunder Mountain Railroad, to the Rock 'n' Roller Coaster and the Tower of Terror.
We've been to Miami, Ft. Lauderdale, and Sanibel and Captiva Islands, and strolled their beautiful beaches. We've been to Charleston, SC and Savannah, GA, and enjoyed the charm of the Old South (and the not-so-healthy, but wonderful, food).
We've been to Hawaii - one of my favorite places on earth. We've been five times, courtesy of my work, and have been blessed to have visited all of the major islands at least once. We've been awestruck by its beauty, and enthralled by its people. We've discovered relatively unknown beaches, snorkeled with sea turtles, and our daughter has played with dolphins on several occasions.
We've been on numerous cruises in the Caribbean. We've been to Key West, St. Thomas, St. Lucia, Antigua, St. Maarten/St. Martin, Puerto Rico, Grand Cayman, Nassau, two private Bahamian islands, Haiti, Barbados, Aruba, Costa Rica, the Panama Canal, Cozumel, Jamaica, and other ports in Mexico. We've also been on individual trips to Tortola and Bermuda. On Tortola, we enjoyed a mile-long beach with less than a dozen other visitors.
We've been to the majestic Canadian Rockies - Banff and Lake Louise. We canoed the gorgeous Moraine Lake, rimmed with ten peaks whose reflection in the clear blue water looked like a photograph. And we rafted the icy glacial waters - much of which I ingested - of the aptly-named Kicking Horse River.
We cruised to Alaska and experienced its awe-inspiring beauty - like Colorado on steroids. We took a seaplane to a remote lodge across a very broad river from a glacier, and ate delicious salmon grilled over alderwood. The ice in our drinks was chipped from the glacier. We visited a dogsled camp, where we were pulled on a wheeled sled up a fire road by a team of dogs, and our daughter got to cuddle the puppies. Our ship docked the last night outside of Vancouver's harbor, where we were treated to an international fireworks competition.
We've been to London and Paris, taken the train through the Chunnel between the two, and visited Salisbury Cathedral, Bath, the Cotswolds and Stonehenge. We've seen plays in London's West End. We've seen where the most famous member of my clan - William Wallace - was accused of treason, and where he was hanged. We found a quaint pub in London, and my wife persuaded them to sell us the wine glasses we used. We rode the London Eye, and afterward found a neat little arcade tucked away in a building, complete with a small bowling alley and bumper cars. We walked the streets of Paris, taking in the architecture, and walked through the rows of trees along the Champs Elysee. We also found a great little wine bar in Paris, and an awesome Italian restaurant in London.
We've been to Phoenix, Tucson and Sedona, Arizona. We've been to Chicago, Indianapolis, Columbus, Louisville, Memphis, and Nashville. We've been to Atlanta and the North Georgia mountains. We've watched some of the world's premier bike racers compete in the Tour de Georgia and the Tour of California. I took a close-up of Lance Armstrong when he was less than five feet from me. We've been to Yankee Stadium, Comiskey Park, Royals Stadium, Camden Yards, Arrowhead Stadium, Chase Field, and Texas Stadium.
Looking through the pictures, I also realized that I've been blessed to have a beautiful home. And we have a wonderful extended family. Looking through the pictures reminded me how much I miss my Dad, and what a clown he was (which is apparently genetic).
But more than that, I'm blessed to have a lovely daughter - she was cute as a button as a kid, and just got cuter with every passing year. She has so much personality, and it shines through her many expressions. She has grown to be a beautiful young woman, which makes me proud enough to offset the bittersweet pain of seeing my baby girl grow up.
And most of all, I have the joy and privilege of sharing my life with the most beautiful woman with whom God ever graced this earth. She is beautiful, she is funny, she is adventurous, she is sexy. She makes me laugh, she makes me cry, she makes me think, she excites me, she makes me relax, she makes me a better person than I'd otherwise be.
When it's all said and done, if I never travel outside my own community again, I have been richly blessed to have seen so much of the world, so much of God's beauty and bounty, and man's creation.
And I will have done it in the company of the two most beautiful, interesting, entertaining, funny, and adventurous people in the world - my daughter and my wife, with whom I'll have the privilege of sharing the rest of my life, come what may. Who could ask for anything more?
Okay, I know I've started posts on here with that word, so for emphasis, let me say it again, with feeling:
WOW.
I took last week off. I reach the end of each year with more vacation time left over than I can get paid for, so since our policy allows us to use last year's excess in the first quarter of this year, I thought I'd burn some. I've been wanting to get some things done - house projects (which I'm caught up on), guitar playing (which I'm woefully behind on), and sorting through pictures for our daughter's high school graduation slide show, which we'll present at the open house we have for her.
On that latter topic, I spent the week after Christmas - which I also took off work - going through all of our digital pics. I knocked that one out pretty handily.
Alas, we didn't go digital, camera-wise, until about 2003. So we have literally thousands of film pics - most with duplicates - to sort through. Rather than just cull the pictures of our daughter, we decided to create a number of categories, and sort them all. Eventually, we'll put them in albums by topic, and/or family, and/or year.
In the process of doing so, I came to a realization: I have been blessed beyond measure.
We have traveled extensively, some on our own, some owing to the fact that I've been fortunate to have been invited to speak at conferences across the nation, and beyond.
We've been to the Rockies of Colorado, and I've seen the world from the top of three 14,000-foot peaks. There is nothing on earth like that view. We've hiked through pine and aspen forests, gone rafting and fishing, and ridden alpine slides.
We've visited the Ozarks of Missouri and Arkansas, and driven their twisty roads. We've covered California, from San Diego to LA to the Temecula valley to San Francisco to Napa and Sonoma Valleys. We've viewed the coastal mountains, laid on the beach at Lake Tahoe, surrounded by forests and peaks. We've strolled the beaches of Coronado Island and Santa Monica, and visited numerous wineries. My wife and I were married in the Napa Valley in March of 1996, and the image of the vineyards with their bare vines promising the hope of a new harvest, with the brilliant yellow mustard growing between the rows of vines adding color to that promise, reminds me of the hope and promise we felt when we committed our lives to one another. And our harvest - at least mine - has been bountiful beyond my wildest dreams. If our life together were a wine, Robert Parker would have to develop a new rating scale.
We've been to Oregon - the coast and the mountains - and Washington. We've driven through forests of pines that seemed to reach to the sky, and gazed over wild rivers and beaches.
We've been to our nation's capital, with all its rich history and its monuments. We paid tribute to my Dad and my wife's Grandpa at the WWII Memorial shortly after its long-overdue completion, and we've walked dumbstruck through the Holocaust Museum, wondering at man's inhumanity to man.
We've been to New York City. We have a picture of us with the twin towers of the World Trade Center in the background and another with their conspicuous absence behind us, and we've been to Ground Zero. We've visited Ellis Island, where our ancestors first arrived on these shores. We've walked through Central Park, watched the St. Patrick's Day Parade, seen numerous Broadway shows, and just absorbed the energy of the city.
We've been to Boston, Cape Cod, Maine, Vermont, New Hampshire. We saw the Old Man of the Mountain before his face fell off, and we've seen the Maine coast and the beautiful verdant mountains of Vermont. We've walked through Boston and seen our nation's history unfolded before us. We've played on the beach on Cape Cod, gone whale-watching there, and stayed in a B&B that was also a working farm - our daughter got to help gather the morning eggs - and was a stop on the Underground Railroad.
We've been to Disney World and Disneyland, and watched our daughter graduate from Dumbo and It's A Small World (thank God for the latter), through Space Mountain and Thunder Mountain Railroad, to the Rock 'n' Roller Coaster and the Tower of Terror.
We've been to Miami, Ft. Lauderdale, and Sanibel and Captiva Islands, and strolled their beautiful beaches. We've been to Charleston, SC and Savannah, GA, and enjoyed the charm of the Old South (and the not-so-healthy, but wonderful, food).
We've been to Hawaii - one of my favorite places on earth. We've been five times, courtesy of my work, and have been blessed to have visited all of the major islands at least once. We've been awestruck by its beauty, and enthralled by its people. We've discovered relatively unknown beaches, snorkeled with sea turtles, and our daughter has played with dolphins on several occasions.
We've been on numerous cruises in the Caribbean. We've been to Key West, St. Thomas, St. Lucia, Antigua, St. Maarten/St. Martin, Puerto Rico, Grand Cayman, Nassau, two private Bahamian islands, Haiti, Barbados, Aruba, Costa Rica, the Panama Canal, Cozumel, Jamaica, and other ports in Mexico. We've also been on individual trips to Tortola and Bermuda. On Tortola, we enjoyed a mile-long beach with less than a dozen other visitors.
We've been to the majestic Canadian Rockies - Banff and Lake Louise. We canoed the gorgeous Moraine Lake, rimmed with ten peaks whose reflection in the clear blue water looked like a photograph. And we rafted the icy glacial waters - much of which I ingested - of the aptly-named Kicking Horse River.
We cruised to Alaska and experienced its awe-inspiring beauty - like Colorado on steroids. We took a seaplane to a remote lodge across a very broad river from a glacier, and ate delicious salmon grilled over alderwood. The ice in our drinks was chipped from the glacier. We visited a dogsled camp, where we were pulled on a wheeled sled up a fire road by a team of dogs, and our daughter got to cuddle the puppies. Our ship docked the last night outside of Vancouver's harbor, where we were treated to an international fireworks competition.
We've been to London and Paris, taken the train through the Chunnel between the two, and visited Salisbury Cathedral, Bath, the Cotswolds and Stonehenge. We've seen plays in London's West End. We've seen where the most famous member of my clan - William Wallace - was accused of treason, and where he was hanged. We found a quaint pub in London, and my wife persuaded them to sell us the wine glasses we used. We rode the London Eye, and afterward found a neat little arcade tucked away in a building, complete with a small bowling alley and bumper cars. We walked the streets of Paris, taking in the architecture, and walked through the rows of trees along the Champs Elysee. We also found a great little wine bar in Paris, and an awesome Italian restaurant in London.
We've been to Phoenix, Tucson and Sedona, Arizona. We've been to Chicago, Indianapolis, Columbus, Louisville, Memphis, and Nashville. We've been to Atlanta and the North Georgia mountains. We've watched some of the world's premier bike racers compete in the Tour de Georgia and the Tour of California. I took a close-up of Lance Armstrong when he was less than five feet from me. We've been to Yankee Stadium, Comiskey Park, Royals Stadium, Camden Yards, Arrowhead Stadium, Chase Field, and Texas Stadium.
Looking through the pictures, I also realized that I've been blessed to have a beautiful home. And we have a wonderful extended family. Looking through the pictures reminded me how much I miss my Dad, and what a clown he was (which is apparently genetic).
But more than that, I'm blessed to have a lovely daughter - she was cute as a button as a kid, and just got cuter with every passing year. She has so much personality, and it shines through her many expressions. She has grown to be a beautiful young woman, which makes me proud enough to offset the bittersweet pain of seeing my baby girl grow up.
And most of all, I have the joy and privilege of sharing my life with the most beautiful woman with whom God ever graced this earth. She is beautiful, she is funny, she is adventurous, she is sexy. She makes me laugh, she makes me cry, she makes me think, she excites me, she makes me relax, she makes me a better person than I'd otherwise be.
When it's all said and done, if I never travel outside my own community again, I have been richly blessed to have seen so much of the world, so much of God's beauty and bounty, and man's creation.
And I will have done it in the company of the two most beautiful, interesting, entertaining, funny, and adventurous people in the world - my daughter and my wife, with whom I'll have the privilege of sharing the rest of my life, come what may. Who could ask for anything more?
Sunday, January 18, 2009
The Failout, Pt. II
Well, President-elect Obama persuaded President Bush to ask Congress for the second $350 billion of TARP money, and despite some jawboning by the handful of fiscal conservatives left in Congress, it breezed through the House and Senate. So after Mr. Obama has wrapped up all his $158 million worth of inaugural balls, the money will be sitting there waiting for him and his tax-dodging Treasury Secretary, Tim Geithner, to spend.
It will fail.
It will not do anything but buy time, prolong the inevitable, and raise your and my tax bills for a long time to come.
Am I just being my curmudgeonly self? No. This is not rocket science, my friends.
For one thing, every special interest group out there has their hand out for a piece of the pie, and the populist President-elect and the free-giving (as long as it's taxpayer money) Congress thus far appear all to willing to invite everyone to the table. The automakers will undoubtedly ask for more, commercial real estate developers want in, credit unions are making a pitch, the automakers' captive finance arms and other consumer lenders are on bended knee, homebuilders are pleading their case, the big bond insurers are in the queue, and so on, ad nauseum.
Inclusiveness is a great thing, but let's face it: if $350 billion didn't help the banks enough to save them, divvying up the next tranche won't provide enough assistance to any one of the myriad groups that are playing a domestic version of beggar-thy-neighbor. Put another way, it's noble to invite all the hungry in your community to your house for Thanksgiving dinner. But if you don't up-size the menu, everybody walks away still hungry.
Don't get me wrong - I am NOT for one minute advocating increasing the size of the TARP (though that is eventually going to happen - I'll say it's about a calendar quarter away, given that tranche one was authorized in late September and spent by year-end, and tranche 2 is authorized now and ready to go). Faithful readers of this blog know that I have been adamantly opposed to this miserable failure of a wretchedly bad idea from the get-go.
But how do I know it won't work? What if they didn't divvy up the money?
Remember how Hank Paulson sat a handful of big banks down and made them take the first disbursements of TARP funds? They all looked down their patrician noses and said, "We don't need a bailout - we're healthy."
One of them was Citigroup. Citi's stock traded in the $40-50 range from 2004 through early 2007. Then the subprime birds came home to roost. Citi's share price fell below $30 by year-end 2007. By March of last year, when the crisis hit full bloom, it was under $20.
In October, after the TARP passed, Citi's stock jumped from a low of less than $15 a share before the TARP negotiations got under way, to $23. But then it plunged to about $13, until Citi got its first infusion of TARP money, upon which it rebounded to more than $17 a share.
Guess what? Even after getting taxpayer assistance, Citi's stock fell to $3.77 in late November, and closed last Friday at $3.50. Citi lost $8.3 billion last quarter - its fifth quarterly loss in a row, and not much improved from the year-ago quarterly loss of $8.9 billion. So the government Friday announced plans to give Citi more assistance, in the form of backstopping 90% of all but the first $39.5 billion of Citi's estimated $301 billion losses. (In case you don't want to do the math, that puts us taxpayers on the hook for more than $235 billion of Citi's bad bets.)
Another bank that harumphed it didn't need aid was BofA, the nation's largest bank by assets. Remember the week that AIG, Merrill and Lehman all went kaput in one form or another? Merrill, seeing Lehman be allowed to fail without government rescue, went to one of its largest creditors and asked that they extend a line of credit necessary to keep Merrill from failing.
That creditor was BofA, and they put their foot on Merrill's throat, saying no to the credit line extension but offering to buy Merrill - on the cheap, it appeared. Merrill's board had no alternative but to accept the offer.
So BofA - which earlier bought failed subprime lending giant Countrywide - now owned the nation's best-known brokerage. Then, the deal began looking ever less cheap. They announced 15,000 job cuts. Then 30,000. Then 35,000. Then, last week, BofA announced its first quarterly loss in 17 years, losing $1.8 billion. Worse, that didn't include the $15.3 billion in losses at Merrill, as the books didn't close on the deal until after year-end.
Along with the loss announcement, BofA announced it would need government assistance to complete the Merrill acquisition - an acquisition that it made of its own accord, not at the government's behest. BofA set the price, so if it wasn't enough to cover Merrill's losses, shame on them for not knowing how to value a business. But no, they're getting another $20 billion of taxpayer money, plus they're getting a backstop of $118 billion of bad assets. All tolled, the cost to the taxpayer for the aid to BofA and Citi alone could top $350 billion.
That, my friends, is a TARP tranche in itself, and that points to why this will fail: it was intended to shore up the financial sector, and since it passed, Citi and BofA alone have seen their share prices fall by more than 80%. If the first $350 billion was burned through in a quarter, and did nothing to improve the financials' lot, what good will the second tranche do - especially if it's divided up among everybody and his brother?
Another ominous thing about Friday's rescues is that the backstop promises were outside the scope of the TARP - in other words, the Fed (with the help of Mr. Geithner) decided unilaterally to put the taxpayer on the hook for roughly the same amount of money that the President had to formally request under the TARP and Congress had to approve. As I've lamented before, where are the checks and balances? (I'm seeing lots of checks, actually - unfortunately, I don't think the balances are there.)
In a partisan swipe that Mr. Obama took at the outgoing administration, in justifying his request for the second half of the TARP funds, he said, "I know this wasn't an easy vote because of the frustration so many of us share about how the first half of this plan was implemented."
No, Mr. President-elect, we the people were overwhelmingly opposed to the TARP to begin with. Some of us were astute enough to predict it would not work, and would result in a trillion-plus dollar deficit for 2009. And the vast majority of Americans were opposed to the moral hazard of spending taxpayer dollars to bail out banks that were failing due to their own bad decisions, when most of America has managed its own financial affairs responsibly. It had nothing to do with how the TARP was implemented, for it was doomed to fail regardless.
As is part two. So please spare us the warm and fuzzies about how this time it'll work better - especially with a key co-architect of the first go-around at the helm of Treasury (assuming he's not too busy revising the tax code to remove "nanny-gate" risk and the way IMF employees have to pay withholding taxes). Just spend the money, hand us taxpayers the bill, and try to fix something else - global warming maybe. I'm tired of shoveling it off my sidewalks.
It will fail.
It will not do anything but buy time, prolong the inevitable, and raise your and my tax bills for a long time to come.
Am I just being my curmudgeonly self? No. This is not rocket science, my friends.
For one thing, every special interest group out there has their hand out for a piece of the pie, and the populist President-elect and the free-giving (as long as it's taxpayer money) Congress thus far appear all to willing to invite everyone to the table. The automakers will undoubtedly ask for more, commercial real estate developers want in, credit unions are making a pitch, the automakers' captive finance arms and other consumer lenders are on bended knee, homebuilders are pleading their case, the big bond insurers are in the queue, and so on, ad nauseum.
Inclusiveness is a great thing, but let's face it: if $350 billion didn't help the banks enough to save them, divvying up the next tranche won't provide enough assistance to any one of the myriad groups that are playing a domestic version of beggar-thy-neighbor. Put another way, it's noble to invite all the hungry in your community to your house for Thanksgiving dinner. But if you don't up-size the menu, everybody walks away still hungry.
Don't get me wrong - I am NOT for one minute advocating increasing the size of the TARP (though that is eventually going to happen - I'll say it's about a calendar quarter away, given that tranche one was authorized in late September and spent by year-end, and tranche 2 is authorized now and ready to go). Faithful readers of this blog know that I have been adamantly opposed to this miserable failure of a wretchedly bad idea from the get-go.
But how do I know it won't work? What if they didn't divvy up the money?
Remember how Hank Paulson sat a handful of big banks down and made them take the first disbursements of TARP funds? They all looked down their patrician noses and said, "We don't need a bailout - we're healthy."
One of them was Citigroup. Citi's stock traded in the $40-50 range from 2004 through early 2007. Then the subprime birds came home to roost. Citi's share price fell below $30 by year-end 2007. By March of last year, when the crisis hit full bloom, it was under $20.
In October, after the TARP passed, Citi's stock jumped from a low of less than $15 a share before the TARP negotiations got under way, to $23. But then it plunged to about $13, until Citi got its first infusion of TARP money, upon which it rebounded to more than $17 a share.
Guess what? Even after getting taxpayer assistance, Citi's stock fell to $3.77 in late November, and closed last Friday at $3.50. Citi lost $8.3 billion last quarter - its fifth quarterly loss in a row, and not much improved from the year-ago quarterly loss of $8.9 billion. So the government Friday announced plans to give Citi more assistance, in the form of backstopping 90% of all but the first $39.5 billion of Citi's estimated $301 billion losses. (In case you don't want to do the math, that puts us taxpayers on the hook for more than $235 billion of Citi's bad bets.)
Another bank that harumphed it didn't need aid was BofA, the nation's largest bank by assets. Remember the week that AIG, Merrill and Lehman all went kaput in one form or another? Merrill, seeing Lehman be allowed to fail without government rescue, went to one of its largest creditors and asked that they extend a line of credit necessary to keep Merrill from failing.
That creditor was BofA, and they put their foot on Merrill's throat, saying no to the credit line extension but offering to buy Merrill - on the cheap, it appeared. Merrill's board had no alternative but to accept the offer.
So BofA - which earlier bought failed subprime lending giant Countrywide - now owned the nation's best-known brokerage. Then, the deal began looking ever less cheap. They announced 15,000 job cuts. Then 30,000. Then 35,000. Then, last week, BofA announced its first quarterly loss in 17 years, losing $1.8 billion. Worse, that didn't include the $15.3 billion in losses at Merrill, as the books didn't close on the deal until after year-end.
Along with the loss announcement, BofA announced it would need government assistance to complete the Merrill acquisition - an acquisition that it made of its own accord, not at the government's behest. BofA set the price, so if it wasn't enough to cover Merrill's losses, shame on them for not knowing how to value a business. But no, they're getting another $20 billion of taxpayer money, plus they're getting a backstop of $118 billion of bad assets. All tolled, the cost to the taxpayer for the aid to BofA and Citi alone could top $350 billion.
That, my friends, is a TARP tranche in itself, and that points to why this will fail: it was intended to shore up the financial sector, and since it passed, Citi and BofA alone have seen their share prices fall by more than 80%. If the first $350 billion was burned through in a quarter, and did nothing to improve the financials' lot, what good will the second tranche do - especially if it's divided up among everybody and his brother?
Another ominous thing about Friday's rescues is that the backstop promises were outside the scope of the TARP - in other words, the Fed (with the help of Mr. Geithner) decided unilaterally to put the taxpayer on the hook for roughly the same amount of money that the President had to formally request under the TARP and Congress had to approve. As I've lamented before, where are the checks and balances? (I'm seeing lots of checks, actually - unfortunately, I don't think the balances are there.)
In a partisan swipe that Mr. Obama took at the outgoing administration, in justifying his request for the second half of the TARP funds, he said, "I know this wasn't an easy vote because of the frustration so many of us share about how the first half of this plan was implemented."
No, Mr. President-elect, we the people were overwhelmingly opposed to the TARP to begin with. Some of us were astute enough to predict it would not work, and would result in a trillion-plus dollar deficit for 2009. And the vast majority of Americans were opposed to the moral hazard of spending taxpayer dollars to bail out banks that were failing due to their own bad decisions, when most of America has managed its own financial affairs responsibly. It had nothing to do with how the TARP was implemented, for it was doomed to fail regardless.
As is part two. So please spare us the warm and fuzzies about how this time it'll work better - especially with a key co-architect of the first go-around at the helm of Treasury (assuming he's not too busy revising the tax code to remove "nanny-gate" risk and the way IMF employees have to pay withholding taxes). Just spend the money, hand us taxpayers the bill, and try to fix something else - global warming maybe. I'm tired of shoveling it off my sidewalks.
Saturday, January 10, 2009
Once More Into the Breach, Dear Friends
There's going to be another real estate bubble, and it's going to burst. (And no, I'm not talking about commercial real estate; that market's already collapsing.) When it does, housing prices are going to fall again. And it's going to happen just after the market begins recovering from the current real estate downturn, probably in the first half of 2010.
Why am I spreading this sunshine? Is it just another curmudgeonly conspiracy theory?
Nope. It's just the way things are shaking out in the real estate market.
I've reported in the past that by the end of 2008 it had been projected that banks would own a third of all real estate on the market. And it looks like that was indeed the case. As a result, foreclosure sales have come to dominate all real estate sales, accounting for nearly half of all homes purchased in the US in November. Sales in hard-hit California alone rose 83% in November, with the bulk of the activity in foreclosure sales, as banks are desperate to get out of the property management business that they were forced into involuntarily.
But wait - that's good news, right? Homes are selling! Homeownership is expanding! We're on the road to recovery! Barney Frank is happy!
Not quite so fast. The problem lies in just whom is buying these foreclosed properties.
Many of them are in disrepair - neglected since the foreclosed homeowner was forced out; or vandalized, either by the bitter homeowner on his way out or since the house stood vacant. So who's buying these fixer-uppers?
The same speculators that contributed mightily to the original bubble.
That's right, the majority of these sales are to the "Flip This House" crowd, hoping once more to make a quick buck turning these properties around when the time comes. That's simply going to lead to more speculation, which will artificially inflate prices again, which will require another correction.
Which will be painful.
We might at least hope that this time, the frenzy won't be fueled by the mindless relaxation of credit that we saw with the subprime mess. But there's the Barney Frank factor: this crazed desire to expand homeownership beyond the economically sustainable rate through lax credit. As long as Barney and his ilk are around, the risk remains that credit standards will be driven down again. Then there's Helicopter Ben, and his foray back into the rates-too-low-for-too-long jungle.
The risk is also exacerbated by the lack of skin in the game these speculators have. Once again, they'll have no compunctions about walking away from the home if the price doesn't rise fast enough to suit them, or if they face a reset on an ARM.
Lest you think I'm just being my usual curmudgeonly self, here's a comment from another guy who watches this stuff:
"We're creating a shadow inventory of homes that will be right back on the market as soon as the economy and the housing market begin to improve. We could see a double-dip in the housing market if that happens."
So who's this doom-and-gloomer? Dr. Joseph Stiglitz of Columbia University, who won a Nobel Prize in economics for seeing the first housing collapse coming.
Why am I spreading this sunshine? Is it just another curmudgeonly conspiracy theory?
Nope. It's just the way things are shaking out in the real estate market.
I've reported in the past that by the end of 2008 it had been projected that banks would own a third of all real estate on the market. And it looks like that was indeed the case. As a result, foreclosure sales have come to dominate all real estate sales, accounting for nearly half of all homes purchased in the US in November. Sales in hard-hit California alone rose 83% in November, with the bulk of the activity in foreclosure sales, as banks are desperate to get out of the property management business that they were forced into involuntarily.
But wait - that's good news, right? Homes are selling! Homeownership is expanding! We're on the road to recovery! Barney Frank is happy!
Not quite so fast. The problem lies in just whom is buying these foreclosed properties.
Many of them are in disrepair - neglected since the foreclosed homeowner was forced out; or vandalized, either by the bitter homeowner on his way out or since the house stood vacant. So who's buying these fixer-uppers?
The same speculators that contributed mightily to the original bubble.
That's right, the majority of these sales are to the "Flip This House" crowd, hoping once more to make a quick buck turning these properties around when the time comes. That's simply going to lead to more speculation, which will artificially inflate prices again, which will require another correction.
Which will be painful.
We might at least hope that this time, the frenzy won't be fueled by the mindless relaxation of credit that we saw with the subprime mess. But there's the Barney Frank factor: this crazed desire to expand homeownership beyond the economically sustainable rate through lax credit. As long as Barney and his ilk are around, the risk remains that credit standards will be driven down again. Then there's Helicopter Ben, and his foray back into the rates-too-low-for-too-long jungle.
The risk is also exacerbated by the lack of skin in the game these speculators have. Once again, they'll have no compunctions about walking away from the home if the price doesn't rise fast enough to suit them, or if they face a reset on an ARM.
Lest you think I'm just being my usual curmudgeonly self, here's a comment from another guy who watches this stuff:
"We're creating a shadow inventory of homes that will be right back on the market as soon as the economy and the housing market begin to improve. We could see a double-dip in the housing market if that happens."
So who's this doom-and-gloomer? Dr. Joseph Stiglitz of Columbia University, who won a Nobel Prize in economics for seeing the first housing collapse coming.
Friday, January 9, 2009
Oh, I Give Up!
I hate stocks. Not individual stocks, mind you, but the market and the way it trades. It's being manipulated, you know - by the talking heads and self-interested traders on Bubblevision, by Hank Paulson, by Ben Bernanke, by George Bush and Barack Obama, and by every economist out there. Well, practically every one; Nouriel Roubini, Joseph Stiglitz, and yours truly are some exceptions.
Think I'm just crying "conspiracy theory?" Well, think again.
Late last year, when the market was melting down, Bush's comforting comments were always timed to come before the opening bell. Hmmmm ... coincidence? And remember when Hank was pushing for the TARP to get passed "before the market opens Monday morning?" Heck, he wasn't even being coy about it!
This morning, there was a trader on Bubblevision, being interviewed by the vapid Mark Haines and whomever was subbing for Erin Burnett. The trader - commenting after the Bureau of Labor Statistics had informed us the US economy shed 524,000 jobs in December, even more than that in November, and that unemployment was at a 16-year high - said something along the lines of, "Look, this economy's bad, we're going to see a lot of jobs lost, earnings are going to be terrible, but you just have to discount that and determine that this is a good time to get into the market."
Huh?
He also cited the so-called January effect, which holds that stocks will rise in January, because investors who dumped stocks in December for tax purposes will jump back into the market, and the buying pressure will bid prices up. The fundamental flaw in the theory is that it ignores whether we're in a bull or bear market. In a bear market, those investors may not want to get back into stocks, if they believe earnings will be too weak to support valuations. In fact, the January effect hasn't worked so hot for the past several years - which the trader acknowledged, but insisted that this year will be different.
If you believe that, Charlie Brown, Lucy's holding the ball, and you can run up and kick it.
As for the economists, what they're doing is baking increasingly pessimistic forecasts into the data. For most of the past year or more, they were just the opposite - too optimistic. Why? Aren't these guys pointy-headed, scientific seekers of the rational truth?
No, most of them are bank employees. And banks make money when people are borrowing willy-nilly. So the economists hid how bad things were likely to be, so that you and I would keep borrowing ourselves to the hilt, blissfully unaware of the coming economic carnage.
And with every monthly data release came news that was much worse than forecast. And every time that happened - at least for the significant releases - the market tanked. A prime example of this was the February 5, 2008 release of the ISM Non-Manufacturing Index for January, a measure of the health of the service sector. The index plunged unexpectedly that month, falling to a level that suggested the service economy was in contraction - not surprising, since so much of the service economy is made up of lenders, and mortgage lending had ground to a halt. The Dow fell 360 points that day, a decline that isn't that shocking given the volatility we saw late last year, but it was a real stunner at the time.
Now, the economists (and the banks that employ them) realize that people aren't going to borrow in the near term. So, they're trying to keep the stock market from going into free-fall, which will only spook people more. Get stocks to signal that the recession is at its trough, and we're starting the recovery process, and people will smile again, and max out their household debt again.
How do you do that? Simple: the market doesn't like it when numbers come in worse than expected, but it does like it when numbers are better than expected. So, as a fraternity brother once advised when some of the pledges couldn't get dates for homecoming, just lower your expectations! The economists are now baking in very disconcerting forecasts, trying to avoid the unwelcome market reaction to a downside surprise - and in fact trying to manipulate a favorable reaction by creating an upside surprise.
But whether a number meets forecast or not simply tells us the extent to which the forecasters were wrong. A number that comes in better than expected simply tells us economists erred on the low side, and vice versa. Understanding their motivation helps us realize that sometimes, the errors are intentional.
The bottom line is that the number is what it is. We should look at the level of the number, not the level relative to the forecast. This morning's jobs report was a good case in point: payrolls fell less than expected - but it was still an enormously ugly number. And it's not like the market tanked when it first saw the consensus forecast.
This morning's data actually gives us a peek into what we might expect for the economy and stocks over the course of this year. The jobs data, of course, was sobering. We shed more than 2.5 million jobs in 2008, more than any year since 1945 - yes, I said 1945 - and wiped out every job created from the second quarter of 2006 through the end of 2007. And 1.9 million of those losses came in the last four months of the year alone, and were accelerating into year-end.
Now, several big retailers reported that holiday sales were awful, and that 2009 earnings are going to be even lower than they last told us. Macy's is closing 11 stores - probably more before it's all said and done. Even Wal-Mart is hurting, so it's not like people are just eschewing luxury purchases - they're not even buying cheap stuff.
Okay, so do you think that's going to get better with more people out of work? And, those stores that close, do you think they're going to retain all their employees? Of course they're not. So - more joblessness. Which means less buying of stuff. Which means ... etc. And that's ignoring the fact that planned layoffs in December were up 275% year-over-year. We haven't yet heard from these retailers.
The other number that came out this morning was Wholesale Inventories for November. Now, not only is this a relatively stale number, since it's now January, but it's typically not a big market-mover. But even this mundane release carries some chilling evidence of what's to come.
Looking at inventory growth year-over-year (a less "noisy" measure than the monthly change), we see that wholesalers have being doing a decent job of late in bringing down the inventory overhang they were facing. It's not like they hadn't cut back; they just hadn't cut back enough. They did not anticipate the sudden collapse of demand that materialized in the second half of last year. So inventories year-over-year began to balloon, reaching an 11% pace by August.
Since then, as I said, they've been coming down, reaching a 6.3% pace by November, which is pretty close to normal.
The trouble is, in terms of the flip side of the inventory equation - sales - this ain't "normal."
Sales are falling much faster than companies can clear inventories, so the inventory-to-sales ratio has been climbing rapidly, even as inventories themselves are shrinking. That means companies have to reduce inventories by not making stuff, since they can't reduce them by selling stuff.
And when companies aren't making stuff, they lay off their workers and idle their plants. And the spiral continues.
So it's going to get still uglier in 2009, uglier than the stock market reflects at current valuations. But hey, just discount that and dive right in.
Think I'm just crying "conspiracy theory?" Well, think again.
Late last year, when the market was melting down, Bush's comforting comments were always timed to come before the opening bell. Hmmmm ... coincidence? And remember when Hank was pushing for the TARP to get passed "before the market opens Monday morning?" Heck, he wasn't even being coy about it!
This morning, there was a trader on Bubblevision, being interviewed by the vapid Mark Haines and whomever was subbing for Erin Burnett. The trader - commenting after the Bureau of Labor Statistics had informed us the US economy shed 524,000 jobs in December, even more than that in November, and that unemployment was at a 16-year high - said something along the lines of, "Look, this economy's bad, we're going to see a lot of jobs lost, earnings are going to be terrible, but you just have to discount that and determine that this is a good time to get into the market."
Huh?
He also cited the so-called January effect, which holds that stocks will rise in January, because investors who dumped stocks in December for tax purposes will jump back into the market, and the buying pressure will bid prices up. The fundamental flaw in the theory is that it ignores whether we're in a bull or bear market. In a bear market, those investors may not want to get back into stocks, if they believe earnings will be too weak to support valuations. In fact, the January effect hasn't worked so hot for the past several years - which the trader acknowledged, but insisted that this year will be different.
If you believe that, Charlie Brown, Lucy's holding the ball, and you can run up and kick it.
As for the economists, what they're doing is baking increasingly pessimistic forecasts into the data. For most of the past year or more, they were just the opposite - too optimistic. Why? Aren't these guys pointy-headed, scientific seekers of the rational truth?
No, most of them are bank employees. And banks make money when people are borrowing willy-nilly. So the economists hid how bad things were likely to be, so that you and I would keep borrowing ourselves to the hilt, blissfully unaware of the coming economic carnage.
And with every monthly data release came news that was much worse than forecast. And every time that happened - at least for the significant releases - the market tanked. A prime example of this was the February 5, 2008 release of the ISM Non-Manufacturing Index for January, a measure of the health of the service sector. The index plunged unexpectedly that month, falling to a level that suggested the service economy was in contraction - not surprising, since so much of the service economy is made up of lenders, and mortgage lending had ground to a halt. The Dow fell 360 points that day, a decline that isn't that shocking given the volatility we saw late last year, but it was a real stunner at the time.
Now, the economists (and the banks that employ them) realize that people aren't going to borrow in the near term. So, they're trying to keep the stock market from going into free-fall, which will only spook people more. Get stocks to signal that the recession is at its trough, and we're starting the recovery process, and people will smile again, and max out their household debt again.
How do you do that? Simple: the market doesn't like it when numbers come in worse than expected, but it does like it when numbers are better than expected. So, as a fraternity brother once advised when some of the pledges couldn't get dates for homecoming, just lower your expectations! The economists are now baking in very disconcerting forecasts, trying to avoid the unwelcome market reaction to a downside surprise - and in fact trying to manipulate a favorable reaction by creating an upside surprise.
But whether a number meets forecast or not simply tells us the extent to which the forecasters were wrong. A number that comes in better than expected simply tells us economists erred on the low side, and vice versa. Understanding their motivation helps us realize that sometimes, the errors are intentional.
The bottom line is that the number is what it is. We should look at the level of the number, not the level relative to the forecast. This morning's jobs report was a good case in point: payrolls fell less than expected - but it was still an enormously ugly number. And it's not like the market tanked when it first saw the consensus forecast.
This morning's data actually gives us a peek into what we might expect for the economy and stocks over the course of this year. The jobs data, of course, was sobering. We shed more than 2.5 million jobs in 2008, more than any year since 1945 - yes, I said 1945 - and wiped out every job created from the second quarter of 2006 through the end of 2007. And 1.9 million of those losses came in the last four months of the year alone, and were accelerating into year-end.
Now, several big retailers reported that holiday sales were awful, and that 2009 earnings are going to be even lower than they last told us. Macy's is closing 11 stores - probably more before it's all said and done. Even Wal-Mart is hurting, so it's not like people are just eschewing luxury purchases - they're not even buying cheap stuff.
Okay, so do you think that's going to get better with more people out of work? And, those stores that close, do you think they're going to retain all their employees? Of course they're not. So - more joblessness. Which means less buying of stuff. Which means ... etc. And that's ignoring the fact that planned layoffs in December were up 275% year-over-year. We haven't yet heard from these retailers.
The other number that came out this morning was Wholesale Inventories for November. Now, not only is this a relatively stale number, since it's now January, but it's typically not a big market-mover. But even this mundane release carries some chilling evidence of what's to come.
Looking at inventory growth year-over-year (a less "noisy" measure than the monthly change), we see that wholesalers have being doing a decent job of late in bringing down the inventory overhang they were facing. It's not like they hadn't cut back; they just hadn't cut back enough. They did not anticipate the sudden collapse of demand that materialized in the second half of last year. So inventories year-over-year began to balloon, reaching an 11% pace by August.
Since then, as I said, they've been coming down, reaching a 6.3% pace by November, which is pretty close to normal.
The trouble is, in terms of the flip side of the inventory equation - sales - this ain't "normal."
Sales are falling much faster than companies can clear inventories, so the inventory-to-sales ratio has been climbing rapidly, even as inventories themselves are shrinking. That means companies have to reduce inventories by not making stuff, since they can't reduce them by selling stuff.
And when companies aren't making stuff, they lay off their workers and idle their plants. And the spiral continues.
So it's going to get still uglier in 2009, uglier than the stock market reflects at current valuations. But hey, just discount that and dive right in.
Wednesday, January 7, 2009
Another Look Inside the Cabinet
Long time, no post. I hope everyone had a blessed and joyous Christmas (or Kwanzaa or Chanukah or whatever), and I wish you a happy and prosperous 2009, in spite of all the bad news I'll be throwing your way in the days, weeks and months to come.
My four Christmases were wonderful, though I'm glad that aspect of the holidays have ended, and then I took off work the week after Christmas. I spent some much-needed time with my lovely wife, did some things around the house, took down the Christmas stuff, started sorting through pictures and music for our daughter's high school graduation slide show (requiring occasional "melt-down" breaks), and saw several movies. "Marley & Me" and "Slumdog Millionaire" are highly recommended. Take plenty of tissues for the former, and be prepared for some difficult-to-watch moments in the latter - conditions in the slums of Mumbai are abhorrent. Skip "Quantum of Solace," even if you're a die-hard Bond fan, as am I.
Okay, so much for the holiday niceties. One would expect I'd ring in the new year by talking about the deficit, or giving a forecast for the coming year. But first I want to take another peek at the incoming Obama administration, as more has come to light about who's filling what role, and several people asked me my opinion over the holidays. One of them commented that Obama's cabinet seemed to be more centrist, which is needed, so I particularly want to examine that.
To start this exercise, I'm going to list, for each cabinet post, Bush's first appointment, then Obama's. Then we'll dissect some of the picks to see where they fall on the left-right continuum. (Sorry, I don't know how to embed a table, so the spacing will be off.)
President Bush Obama
Sec. of State Colin Powell Hillary Clinton
Treasury Paul O'Neill Tim Geithner
Defense Donald Rumsfeld Robert Gates
Atty. General John Ashcroft Eric Holder
Interior Gale Norton Ken Salazar
Agriculture Ann Veneman Tom Vilsack
Commerce Donald Evans Bill Richardson (oops!)
Labor Elaine Chao Hilda Solis
Health & Human Services Tommy Thompson Tom Daschle
Education Rod Paige Arne Duncan
HUD Mel Martinez Shaun Donovan
Transportation Norman Mineta Ray LaHood
Energy Spencer Abraham Steven Chu
VA Anthony Principi Eric Shinseki
Homeland Security Tom Ridge Janet Napolitano
EPA Christine Todd Whitman Lisa Jackson
OMB Mitch Daniels Peter Orszag
Okay, how do they stack up. First of all, I'll address diversity, and both get pretty good marks here. They're pretty much equal in terms of appointing African- and Asian-Americans, Hispanics, females, etc. So both cabinets are pretty "centrist" in terms of being a cabinet that "looks like America." Bush also at least maintained, if not increased, the diversity of his cabinet as changes were made, and I suspect Obama would do the same.
Now, as for the leanings. Rumsfeld was obvious a hawk, and a bad choice with whom Bush stuck for too long. He replaced him with Gates, whom Obama is keeping in the job. So if that's a "centrist" pick by Obama, it was equally centrist by Bush, even if it wasn't his initial pick.
Ashcroft was branded an extreme right guy, but mainly due to his faith. He was actually a darn good pick for the job, a very capable legal mind. But any President is going to lean toward the party platform when choosing an AG, and Obama pretty much did the same.
Ridge is a pretty conservative guy, but he did a good job in his newly-created role, so it's hard to see him as too far right.
Most of the rest of Bush's picks were pretty moderate, like Whitman and Powell and later, Rice. O'Neill was a fiscal conservative, whereas Geithner is a socialist in the mold of Paulson. O'Neill would never have gotten us into the bailout frenzy in my opinion.
Obama's picks overall seem to me to smack of ties to the Illinois Democratic machine, Washington insiders - current Senators and Reps, lots of Clinton cabinet retreads, and favors paid for helping the campaign (not unlike Bush, or any other incoming Prez though). In short, it looks a lot more like more of the same old Washington than like change.
But I think in part that's a function of the differences between Obama and Bush coming into the office. Bush gets slammed for being the opposite of his infamous "I'm a uniter, not a divider" line. But that was exactly his track record in Texas, where he hails from.
Washington ain't Texas. It didn't help that this country was bitterly divided already. It didn't help that the media fed on that divide. It certainly didn't help that Democrats felt that Bush "stole the election in the courts" from Gore, a curious bit of revisionist history that still puzzles me. Gore conceded he'd lost, then decided to file a lawsuit, then lost, then claimed Bush stole the election in the courts.
The analogy is, I have something you want and you compliment me on having it, then you decide to claim that it was rightfully yours to begin with, so you sue me. The court finds no basis for your claim, and lets me keep the thing you want, so you go around claiming I stole it from you in court. Hey, I had it to begin with; you're the one who took legal action.
So anyway, back to the divide. As I said, Washington ain't Texas, and the people there ain't Texans. A governor entering the White House is used to being the boss - a CEO. So he's going to be inclined to do things his way. He's going to see Congress as his underlings more or less.
And power-hungry, big-egoed Congresspersons have to hate that.
They're used to compromise, to the point of being smarmy. We're talking sleeping-with-pigs compromise. And they're used to getting their palms greased by special interests.
An incoming Prez with a CEO background and mindset isn't going to cotton to that, to use a Texas term. So there's going to be a gulf - what should, to us Americans, be a very refreshing gulf.
Conversely, an incoming Prez who hails from the Senate himself is going to fill his cabinet with compromisers. And the pigs will all just keep sleeping with each other, most likely to the detriment of we, the people.
So which more represents change? Well, if Obama was promising change from Bush, he'll deliver that, probably.
But if he was offering change from the old-school, palm-greasing, dirty tricks, politics as usual that our legislative bodies have come to represent ...
Good luck with that. If you believe that's coming, I have some nice houses in Phoenix I'd like to sell you, at 2005 prices.
My four Christmases were wonderful, though I'm glad that aspect of the holidays have ended, and then I took off work the week after Christmas. I spent some much-needed time with my lovely wife, did some things around the house, took down the Christmas stuff, started sorting through pictures and music for our daughter's high school graduation slide show (requiring occasional "melt-down" breaks), and saw several movies. "Marley & Me" and "Slumdog Millionaire" are highly recommended. Take plenty of tissues for the former, and be prepared for some difficult-to-watch moments in the latter - conditions in the slums of Mumbai are abhorrent. Skip "Quantum of Solace," even if you're a die-hard Bond fan, as am I.
Okay, so much for the holiday niceties. One would expect I'd ring in the new year by talking about the deficit, or giving a forecast for the coming year. But first I want to take another peek at the incoming Obama administration, as more has come to light about who's filling what role, and several people asked me my opinion over the holidays. One of them commented that Obama's cabinet seemed to be more centrist, which is needed, so I particularly want to examine that.
To start this exercise, I'm going to list, for each cabinet post, Bush's first appointment, then Obama's. Then we'll dissect some of the picks to see where they fall on the left-right continuum. (Sorry, I don't know how to embed a table, so the spacing will be off.)
President Bush Obama
Sec. of State Colin Powell Hillary Clinton
Treasury Paul O'Neill Tim Geithner
Defense Donald Rumsfeld Robert Gates
Atty. General John Ashcroft Eric Holder
Interior Gale Norton Ken Salazar
Agriculture Ann Veneman Tom Vilsack
Commerce Donald Evans Bill Richardson (oops!)
Labor Elaine Chao Hilda Solis
Health & Human Services Tommy Thompson Tom Daschle
Education Rod Paige Arne Duncan
HUD Mel Martinez Shaun Donovan
Transportation Norman Mineta Ray LaHood
Energy Spencer Abraham Steven Chu
VA Anthony Principi Eric Shinseki
Homeland Security Tom Ridge Janet Napolitano
EPA Christine Todd Whitman Lisa Jackson
OMB Mitch Daniels Peter Orszag
Okay, how do they stack up. First of all, I'll address diversity, and both get pretty good marks here. They're pretty much equal in terms of appointing African- and Asian-Americans, Hispanics, females, etc. So both cabinets are pretty "centrist" in terms of being a cabinet that "looks like America." Bush also at least maintained, if not increased, the diversity of his cabinet as changes were made, and I suspect Obama would do the same.
Now, as for the leanings. Rumsfeld was obvious a hawk, and a bad choice with whom Bush stuck for too long. He replaced him with Gates, whom Obama is keeping in the job. So if that's a "centrist" pick by Obama, it was equally centrist by Bush, even if it wasn't his initial pick.
Ashcroft was branded an extreme right guy, but mainly due to his faith. He was actually a darn good pick for the job, a very capable legal mind. But any President is going to lean toward the party platform when choosing an AG, and Obama pretty much did the same.
Ridge is a pretty conservative guy, but he did a good job in his newly-created role, so it's hard to see him as too far right.
Most of the rest of Bush's picks were pretty moderate, like Whitman and Powell and later, Rice. O'Neill was a fiscal conservative, whereas Geithner is a socialist in the mold of Paulson. O'Neill would never have gotten us into the bailout frenzy in my opinion.
Obama's picks overall seem to me to smack of ties to the Illinois Democratic machine, Washington insiders - current Senators and Reps, lots of Clinton cabinet retreads, and favors paid for helping the campaign (not unlike Bush, or any other incoming Prez though). In short, it looks a lot more like more of the same old Washington than like change.
But I think in part that's a function of the differences between Obama and Bush coming into the office. Bush gets slammed for being the opposite of his infamous "I'm a uniter, not a divider" line. But that was exactly his track record in Texas, where he hails from.
Washington ain't Texas. It didn't help that this country was bitterly divided already. It didn't help that the media fed on that divide. It certainly didn't help that Democrats felt that Bush "stole the election in the courts" from Gore, a curious bit of revisionist history that still puzzles me. Gore conceded he'd lost, then decided to file a lawsuit, then lost, then claimed Bush stole the election in the courts.
The analogy is, I have something you want and you compliment me on having it, then you decide to claim that it was rightfully yours to begin with, so you sue me. The court finds no basis for your claim, and lets me keep the thing you want, so you go around claiming I stole it from you in court. Hey, I had it to begin with; you're the one who took legal action.
So anyway, back to the divide. As I said, Washington ain't Texas, and the people there ain't Texans. A governor entering the White House is used to being the boss - a CEO. So he's going to be inclined to do things his way. He's going to see Congress as his underlings more or less.
And power-hungry, big-egoed Congresspersons have to hate that.
They're used to compromise, to the point of being smarmy. We're talking sleeping-with-pigs compromise. And they're used to getting their palms greased by special interests.
An incoming Prez with a CEO background and mindset isn't going to cotton to that, to use a Texas term. So there's going to be a gulf - what should, to us Americans, be a very refreshing gulf.
Conversely, an incoming Prez who hails from the Senate himself is going to fill his cabinet with compromisers. And the pigs will all just keep sleeping with each other, most likely to the detriment of we, the people.
So which more represents change? Well, if Obama was promising change from Bush, he'll deliver that, probably.
But if he was offering change from the old-school, palm-greasing, dirty tricks, politics as usual that our legislative bodies have come to represent ...
Good luck with that. If you believe that's coming, I have some nice houses in Phoenix I'd like to sell you, at 2005 prices.
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