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.
Sunday, October 12, 2008
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.
Of Tootsie Pops, and Global Warming
A friend e-mailed me before the House passed the TARP on the second go-around, asking what my worst-case scenario was in the event the government decided to just let free markets correct themselves.
I told him that was like the old Tootsie Pop commercials - you know, the ones with the wise old owl, who's asked, "How many licks does it take to get to the center of a Tootsie Pop?" The owl, of course, takes three licks, then bites right into the sucker to get at the chocolate center.
In other words, the answer to both questions is, we don't know, because it's never been tried.
But we do know that every time the US government - or any other government, for that matter - has intervened in a financial crisis, they have made it worse, and the citizenry has suffered mightily for it. The Great Depression, the S&L crisis, and now this mess. All created by government, who then dump on us taxpayers to "fix" it.
It just goes to demonstrate something that I included as a slide in the presentation I mentioned in yesterday's post, the one where I traced the legislative history of this fiasco back to 1933. The slide was headed, "The Wisdom of the Georges," and included these quotes:
"Those who cannot learn from history are doomed to repeat it." - George Santayana
"We learn from history that we learn nothing from history." - George Bernard Shaw
"What experience and history teach is this: that people and governments have never learned anything from history, or acted on principles." - George Wilhelm Hegel
"As housing goes, so goes the economy." - George H.W. Bush
On to global warming. I never really put much stock in it. Every time I have to shovel 8 inches of "global warming" off my sidewalk, I get mad at Al Gore.
But now, I'm a believer.
Global warming must exist. Because I keep hearing all these intervention-happy Chicken Littles running around screaming that the credit markets are frozen and nobody's lending money or providing capital.
Yet -
Allianz AG just pumped $2.5 billion into The Hartford. Warren Buffett invested $5 billion in Goldman Sachs. B of A is raising $10 billion in a stock offering. It's going more slowly than they anticipated, and they're not getting the price they'd hoped for, but they're raising the money nonetheless. Fairfax Financial is buying International Forest Products. Citi and Wells Fargo are fighting over Wachovia.
Credit unions reported positive year-over-year loan growth in every category but auto loans. I'm still getting mortgage offers in the mail. My credit card companies have been sending me those stupid cash advance checks every couple of weeks, urging me to use them.
In short, credit markets are not frozen.
The Fed, in justifying the exercise of emergency powers (enacted during the Great Depression, by the way) to buy commercial paper (CP), noted that the CP market was more than $2.2 trillion last year, and it's just $1.6 trillion now.
Besides the fact that the Fed is out of money, and has to borrow from the Treasury (who has to borrow from China) to fund its daily operations, let alone all the happy lending it's doing; and besides the fact that it's creating a Special Purpose Vehicle (SPV) to do this, and SPVs and SIVs were huge contributors to this calamitous melt-down to begin with; a little curtailment of credit might be called for.
I recently gave an economic outlook in Arizona, and I showed graphs of the growth trends in US consumer, mortgage, business, state and local government, and federal debt. Guess which one had the most alarmingly rapid rate of increase in indebtedness over the past few years?
Business debt.
We've over-leveraged, from Wall Street to Main Street (every spineless crook of a politician and his brother is using the term, I may as well too) to your street and my street. Today we also learned that consumer credit contracted for the first time since 1998, and by the largest amount on record.
Good! That's what needs to happen!
Businesses are paring back. Only smart deals are getting done, not the stupid deals that add no value except to investment bankers' bonus checks. Yes, the cost of borrowing is higher. Artificially low rates on all kinds of loans were a big contributor to the great over-leveraging to begin with. So risk is now being priced appropriately again.
Consumers are paring back. They're paying down their credit cards, which is prudent. Mortgage borrowing is being pared back. We're back to the prudent practice of requiring 20% down, proof of income, and a good credit history to get a mortgage. State and local governments, by necessity, are paring back spending, because their income and property tax receipts have been decimated.
Now if only the federal government would get on the bandwagon.
But no, they cry that the economy needs credit, that you and I need to borrow more, that more renters need to become homeowners, that businesses need to borrow and expand and merge. And to git 'er done, they're mortgaging our future to the limit.
Only it won't work.
Remember how they all ran around screaming and waving e-mails from constituents whose 401(k) balances were down after the 777-point sell-off that followed the "no" vote in the House on the bailout? Remember how they said we needed to pass that bill in order to avoid a recession, job losses and the markets tanking?
Have you seen the market's reaction to the bailout?
Since the time of Friday's vote, when the Dow was up on the day by 315 points, it has shed 1,348 points. Almost twice what it lost after the "no" vote.
Dear Congressperson: Thank you for voting yes and saving our 401(k)s. Now please go on recess.
A final note. A reader sent me an e-mail of an exchange on CNN between a financial talk-radio host in Philly and CNN's Senior Business Editor, Ali Velshi.
The guy was pooh-poohing the notion that credit markets are frozen, basically taking the position that the bailout is unnecessary, and that free markets should be allowed to correct themselves, and that we would survive if they did.
Velshi came on and started railing on the guy, screaming that the credit markets are frozen. The guy asked for his fax number so he could send him a mortgage approval that he'd just received from a local bank on a property he was buying.
Velshi's comeback: "Oh sure, you can get a mortgage, but what about the blue-collar guy who's credit isn't so good?"
That. Is. The. Entire. Problem.
The best part of the exchange actually came when the radio guy asked who it was he was talking to. Velshi identified himself, and the radio guy asked what Velshi's qualifications were. Velshi sputtered that his advice mattered more than his qualifications.
I did a little google search on Ali Velshi, and found a Wikipedia entry on him. He grew up in Canada, and then got a college degree in ...
Religious studies.
He then received a fellowship to the US Congress before becoming a beat reporter in Toronto, eventually gravitating to business reporting.
No wonder he didn't want to reveal his credentials.
I told him that was like the old Tootsie Pop commercials - you know, the ones with the wise old owl, who's asked, "How many licks does it take to get to the center of a Tootsie Pop?" The owl, of course, takes three licks, then bites right into the sucker to get at the chocolate center.
In other words, the answer to both questions is, we don't know, because it's never been tried.
But we do know that every time the US government - or any other government, for that matter - has intervened in a financial crisis, they have made it worse, and the citizenry has suffered mightily for it. The Great Depression, the S&L crisis, and now this mess. All created by government, who then dump on us taxpayers to "fix" it.
It just goes to demonstrate something that I included as a slide in the presentation I mentioned in yesterday's post, the one where I traced the legislative history of this fiasco back to 1933. The slide was headed, "The Wisdom of the Georges," and included these quotes:
"Those who cannot learn from history are doomed to repeat it." - George Santayana
"We learn from history that we learn nothing from history." - George Bernard Shaw
"What experience and history teach is this: that people and governments have never learned anything from history, or acted on principles." - George Wilhelm Hegel
"As housing goes, so goes the economy." - George H.W. Bush
On to global warming. I never really put much stock in it. Every time I have to shovel 8 inches of "global warming" off my sidewalk, I get mad at Al Gore.
But now, I'm a believer.
Global warming must exist. Because I keep hearing all these intervention-happy Chicken Littles running around screaming that the credit markets are frozen and nobody's lending money or providing capital.
Yet -
Allianz AG just pumped $2.5 billion into The Hartford. Warren Buffett invested $5 billion in Goldman Sachs. B of A is raising $10 billion in a stock offering. It's going more slowly than they anticipated, and they're not getting the price they'd hoped for, but they're raising the money nonetheless. Fairfax Financial is buying International Forest Products. Citi and Wells Fargo are fighting over Wachovia.
Credit unions reported positive year-over-year loan growth in every category but auto loans. I'm still getting mortgage offers in the mail. My credit card companies have been sending me those stupid cash advance checks every couple of weeks, urging me to use them.
In short, credit markets are not frozen.
The Fed, in justifying the exercise of emergency powers (enacted during the Great Depression, by the way) to buy commercial paper (CP), noted that the CP market was more than $2.2 trillion last year, and it's just $1.6 trillion now.
Besides the fact that the Fed is out of money, and has to borrow from the Treasury (who has to borrow from China) to fund its daily operations, let alone all the happy lending it's doing; and besides the fact that it's creating a Special Purpose Vehicle (SPV) to do this, and SPVs and SIVs were huge contributors to this calamitous melt-down to begin with; a little curtailment of credit might be called for.
I recently gave an economic outlook in Arizona, and I showed graphs of the growth trends in US consumer, mortgage, business, state and local government, and federal debt. Guess which one had the most alarmingly rapid rate of increase in indebtedness over the past few years?
Business debt.
We've over-leveraged, from Wall Street to Main Street (every spineless crook of a politician and his brother is using the term, I may as well too) to your street and my street. Today we also learned that consumer credit contracted for the first time since 1998, and by the largest amount on record.
Good! That's what needs to happen!
Businesses are paring back. Only smart deals are getting done, not the stupid deals that add no value except to investment bankers' bonus checks. Yes, the cost of borrowing is higher. Artificially low rates on all kinds of loans were a big contributor to the great over-leveraging to begin with. So risk is now being priced appropriately again.
Consumers are paring back. They're paying down their credit cards, which is prudent. Mortgage borrowing is being pared back. We're back to the prudent practice of requiring 20% down, proof of income, and a good credit history to get a mortgage. State and local governments, by necessity, are paring back spending, because their income and property tax receipts have been decimated.
Now if only the federal government would get on the bandwagon.
But no, they cry that the economy needs credit, that you and I need to borrow more, that more renters need to become homeowners, that businesses need to borrow and expand and merge. And to git 'er done, they're mortgaging our future to the limit.
Only it won't work.
Remember how they all ran around screaming and waving e-mails from constituents whose 401(k) balances were down after the 777-point sell-off that followed the "no" vote in the House on the bailout? Remember how they said we needed to pass that bill in order to avoid a recession, job losses and the markets tanking?
Have you seen the market's reaction to the bailout?
Since the time of Friday's vote, when the Dow was up on the day by 315 points, it has shed 1,348 points. Almost twice what it lost after the "no" vote.
Dear Congressperson: Thank you for voting yes and saving our 401(k)s. Now please go on recess.
A final note. A reader sent me an e-mail of an exchange on CNN between a financial talk-radio host in Philly and CNN's Senior Business Editor, Ali Velshi.
The guy was pooh-poohing the notion that credit markets are frozen, basically taking the position that the bailout is unnecessary, and that free markets should be allowed to correct themselves, and that we would survive if they did.
Velshi came on and started railing on the guy, screaming that the credit markets are frozen. The guy asked for his fax number so he could send him a mortgage approval that he'd just received from a local bank on a property he was buying.
Velshi's comeback: "Oh sure, you can get a mortgage, but what about the blue-collar guy who's credit isn't so good?"
That. Is. The. Entire. Problem.
The best part of the exchange actually came when the radio guy asked who it was he was talking to. Velshi identified himself, and the radio guy asked what Velshi's qualifications were. Velshi sputtered that his advice mattered more than his qualifications.
I did a little google search on Ali Velshi, and found a Wikipedia entry on him. He grew up in Canada, and then got a college degree in ...
Religious studies.
He then received a fellowship to the US Congress before becoming a beat reporter in Toronto, eventually gravitating to business reporting.
No wonder he didn't want to reveal his credentials.
Monday, October 6, 2008
Now You Tell Me!
First, I'm going to toot my own horn a little.
Every news outlet from MSNBC to FoxNews spent the weekend telling us how the credit crisis was spawned by the New Deal, and exacerbated by everything along the way from the Depository Institutions Deregulation and Monetary Control Act of 1980, to the Tax Reform Act of 1986, to the Community Reinvestment Act and its eventual increased emphasis on making mortgage loans to people who can't afford to pay them back.
In a presentation that I first gave in mid-2007, I traced those very legislative roots. And I used that information to predict the current debacle. I said it would be the worst downturn since the Great Depression. I predicted the S&P 500 would reach as low as 600. And everybody thought I was nuts.
Did you watch the market today?
It will only get worse. The market has not yet priced in the broad realities of a recession: the coming downturn in manufacturing, now that foreign economies' weakness can no longer produce demand for goods denominated in a strengthening (on a relative basis) dollar, or the holiday retail season, which promises to be dismal.
Earnings will suck next year. And speaking of earnings, B of A released their third quarter results today. A week early. Right after the market closed. Those are never harbingers of glad tidings.
True to form, B of A posted net income of 15 cents a share. One-fourth of analysts' expectations. They cut their dividend in half. And they're going to try to raise $10 billion in capital (which, by the way, is why they announced early. They want to get out in front of all the other dismal 3Q08 earnings reports so they can try to raise capital before the market tanks on those reports.)
Tomorrow could be ugly. Thank God I'm short (the market, not in stature).
But hey, I wasn't the only guy who saw this coming. Nouriel Roubini saw it coming. So did a bunch of others. But even we came to the game late.
Know who called this thing first? A dude named Isaiah, who lived nearly 2,800 years ago. He wrote this:
"Woe to you who add house to house and join field to field till no space is left and you live alone in the land. The LORD Almighty has declared in my hearing: 'Surely the great houses will become desolate, the fine mansions left without occupants.'"
(He also said, "Your rulers are rebels, companions of thieves; they all love bribes and chase after gifts.")
Nice segue there, Isaiah.
Speaking of thieves, Hank Paulson is lining up his team of money managers and bond salesmen to execute (pun intended) the bailout. We'll likely see the first round of buying next week. It'll be interesting to see what price they pay for the crap. That will set the tone for whether it's safe for us to keep getting paid in dollars and filing US tax returns.
Hank has also tabbed one of his former underlings at Goldman to head up a new department within Treasury: the Office of Financial Stability. Sorry, but that just cracks me up. It's like installing stabilizers on a cruise ship just before the bow slips below the surface.
And speaking of both thieves and lovers of bribes, former Lehman CEO Dick Fuld was called before Congress today, and accused of being greedy and making a lot of money.
I would have told them where they could put their subpoena. I'd have said, "Sure, I was greedy. I took full advantage of the flawed legislation that you passed in order to line my pockets. You set the rules, and I played by them." Of course, they'd have held me in contempt of Congress. To which I'd have replied, quoting Marty Feldman - "Too late!" I've been in contempt of Congress since it created the S&L crisis, then hired a bunch of guys to do a study to find out what caused it. I'd have worked cheaper, and just hauled a big ol' mirror into the chamber.
Every news outlet from MSNBC to FoxNews spent the weekend telling us how the credit crisis was spawned by the New Deal, and exacerbated by everything along the way from the Depository Institutions Deregulation and Monetary Control Act of 1980, to the Tax Reform Act of 1986, to the Community Reinvestment Act and its eventual increased emphasis on making mortgage loans to people who can't afford to pay them back.
In a presentation that I first gave in mid-2007, I traced those very legislative roots. And I used that information to predict the current debacle. I said it would be the worst downturn since the Great Depression. I predicted the S&P 500 would reach as low as 600. And everybody thought I was nuts.
Did you watch the market today?
It will only get worse. The market has not yet priced in the broad realities of a recession: the coming downturn in manufacturing, now that foreign economies' weakness can no longer produce demand for goods denominated in a strengthening (on a relative basis) dollar, or the holiday retail season, which promises to be dismal.
Earnings will suck next year. And speaking of earnings, B of A released their third quarter results today. A week early. Right after the market closed. Those are never harbingers of glad tidings.
True to form, B of A posted net income of 15 cents a share. One-fourth of analysts' expectations. They cut their dividend in half. And they're going to try to raise $10 billion in capital (which, by the way, is why they announced early. They want to get out in front of all the other dismal 3Q08 earnings reports so they can try to raise capital before the market tanks on those reports.)
Tomorrow could be ugly. Thank God I'm short (the market, not in stature).
But hey, I wasn't the only guy who saw this coming. Nouriel Roubini saw it coming. So did a bunch of others. But even we came to the game late.
Know who called this thing first? A dude named Isaiah, who lived nearly 2,800 years ago. He wrote this:
"Woe to you who add house to house and join field to field till no space is left and you live alone in the land. The LORD Almighty has declared in my hearing: 'Surely the great houses will become desolate, the fine mansions left without occupants.'"
(He also said, "Your rulers are rebels, companions of thieves; they all love bribes and chase after gifts.")
Nice segue there, Isaiah.
Speaking of thieves, Hank Paulson is lining up his team of money managers and bond salesmen to execute (pun intended) the bailout. We'll likely see the first round of buying next week. It'll be interesting to see what price they pay for the crap. That will set the tone for whether it's safe for us to keep getting paid in dollars and filing US tax returns.
Hank has also tabbed one of his former underlings at Goldman to head up a new department within Treasury: the Office of Financial Stability. Sorry, but that just cracks me up. It's like installing stabilizers on a cruise ship just before the bow slips below the surface.
And speaking of both thieves and lovers of bribes, former Lehman CEO Dick Fuld was called before Congress today, and accused of being greedy and making a lot of money.
I would have told them where they could put their subpoena. I'd have said, "Sure, I was greedy. I took full advantage of the flawed legislation that you passed in order to line my pockets. You set the rules, and I played by them." Of course, they'd have held me in contempt of Congress. To which I'd have replied, quoting Marty Feldman - "Too late!" I've been in contempt of Congress since it created the S&L crisis, then hired a bunch of guys to do a study to find out what caused it. I'd have worked cheaper, and just hauled a big ol' mirror into the chamber.
Wednesday, October 1, 2008
A Sad Day for Amerika
No, that's not a typo. Now that we're a socialist state, I figure we might as well make it official.
I won't rant. At least not tonight. I'm too depressed about the travesty that the Senate perpetrated on the American people tonight, and I don't want to ruin my night after an amazing day attending a Contemporary Worship Institute led by the legendary songwriter, Paul Baloche.
So I'll just list the brave, heroic Senators who had the intestinal fortitude and intelligence to stand up to their colleagues, who either don't understand fundamental macroeconomics, or are in the pockets of Wall Street, or both. These men and women - from both sides of the aisle; this is no time for partisan bickering - deserve our continued support. They fight the good fight in the interests of their constituents and a free America.
The rest deserve to be removed from office permanently.
Roberts (R)
Brownback (R)
Allard (R)
Barrasso (R)
Cochran (R)
Dole (R)
Enzi (R)
Sessions (R)
Shelby (R)
DeMint (R)
Vitter (R)
Wicker (R)
Bunning (R)
Inhofe (R)
Crapo (R)
Sanders (I)
Feingold (D)
Stabenow (D)
Dorgan (D)
Tester (D)
Wyden (D)
Johnson (D)
Cantwell (D)
Nelson (D)
Landrieu (D)
Please double your efforts to persuade your Representative to stop this madness, before we're all speaking Chinese.
I won't rant. At least not tonight. I'm too depressed about the travesty that the Senate perpetrated on the American people tonight, and I don't want to ruin my night after an amazing day attending a Contemporary Worship Institute led by the legendary songwriter, Paul Baloche.
So I'll just list the brave, heroic Senators who had the intestinal fortitude and intelligence to stand up to their colleagues, who either don't understand fundamental macroeconomics, or are in the pockets of Wall Street, or both. These men and women - from both sides of the aisle; this is no time for partisan bickering - deserve our continued support. They fight the good fight in the interests of their constituents and a free America.
The rest deserve to be removed from office permanently.
Roberts (R)
Brownback (R)
Allard (R)
Barrasso (R)
Cochran (R)
Dole (R)
Enzi (R)
Sessions (R)
Shelby (R)
DeMint (R)
Vitter (R)
Wicker (R)
Bunning (R)
Inhofe (R)
Crapo (R)
Sanders (I)
Feingold (D)
Stabenow (D)
Dorgan (D)
Tester (D)
Wyden (D)
Johnson (D)
Cantwell (D)
Nelson (D)
Landrieu (D)
Please double your efforts to persuade your Representative to stop this madness, before we're all speaking Chinese.
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