I was reading comments on an application called stocktwits yesterday. The discussion concerned a specific investment and one person questioned how buying that investment helped the US Economy or was patriotic. The response was that the US Economy and patriotism wasn't their concern and that the Government should take care of those things.
In general, investment decisions normally have very little to do with Patriotism but you do have to wonder if there is any limit to greed. Yesterday Bernie Madoff got sentenced to 150 years in jail because he was greedy and proud. I really do think that he lost control of his Ponzi scheme at some point and it escalated beyond his control. He was too proud to admit that his greed was ruining hundreds of people and continued up until the last minute bilking unsuspecting investors out of their money.
So, consider a situation where a lot of money could be made but it would decimate the economy and cause tremendous hardship to millions of people? Is the fact that one or a small number of investors or speculators could get rich offset any obligation they have to their fellow citizens? I can pretty much guarantee that most active investors would feel that they should grasp the opportunity. Certainly to pass on this opportunity would only work if everyone also passed on it, otherwise you wouldn't make the money and end up as one of the losers.
There is some speculation that when Lehman went bankrupt and hedge funds and active investors sold all the bank stock they had and shorted all the bank stock they didn't have it precipitated the collapse in the stock market that wiped out the retirement funds of millions. There is some current controversy over whether the uptick rule should be re-instated (requires that a short sale must be made after an uptick in price). It certainly would have crimped a lot of the short selling, and it may have provided the retail investor time to adjust. Now, many of the short sales weren't printed because their were no buyers and the price simply plummeted. As usual the most money was made by the quickest.
Now, the collapse in the economy was a national and world disaster. We are still feeling the consequences and I wouldn't suggest that anyone should have been buying bank stocks in that time frame since it wouldn't have done any good. However, is there any limit?
In reading posts on financial networks, there are a group of posters who really seem to want the economy to collapse. They probably see that a lot more money can be made in a sudden collapse than in a slow recovery. Of course the desire for the economy to collapse isn't going to have any impact on what it actually does, but you wonder about those who wish for millions to suffer so they can benefit. Of course they argue that if they own property, or invest in the economy, they should sell everything and save what they can because Armageddon is coming.
There is a difference between preparing for Armageddon and trying to make it happen.
Tuesday, June 30, 2009
Monday, June 29, 2009
Recovery formula
There are two things that need to happen for a real recovery to take place in the US Economy. The first requires that housing prices stabilize and start to increase and the second is that we need to create jobs.
The current stimulus efforts are directed at symptoms and not root causes. Providing people on Social Security a $300 stimulus check adds up to a lot of money in the aggregate, but not very much to each individual. What are they going to spend it on? First the check went into their direct deposits. Second, they live on a monthly budget and the extra $300 or $600 for a couple is probably not going to inspire them to run out and buy a new car and the odds are they aren't that into smart phones. Since the money wasn't enough to do much for them, it simply stayed in the bank to cover potential increases in health costs, taxes and/or any number of rainy day possibilities. The fact that economists were surprised, if they were, that the money was reflected as higher savings vs higher spending for the most part is what surprises me.
Also, instead of focusing on what should be and I believe will be our new growth industry in renewable energy, money is being given to protect a relatively small number of jobs in politically significant but economically neutral legacy industries. We are not going to see significant new job growth in the auto related industries. We may see some, but new plants will make better use of robotics and there is going to be fewer cars sold as Americans will be thriftier in the near term, keeping old cars longer. If we were to invest the same amount of money in either converting coal to oil, increasing wind and solar, increasing use of natural gas and increasing the use of ethanol, it would create new jobs, improve spending and reduce our balance of trade and dependence of foreign oil. This is a cumulative impact since every equivalent barrel of US energy we use means we need one less imported. Further it would start to position the US towards the future. We need to get to a fully carbon neutral renewable energy future and we need to start getting there now, but smartly.
The current bill that wants to use CAP and TRADE is a heavily compromised attempt to move in the right direction but is probably doomed. It is hoped that the bill will lead to increased jobs but we can get to increased jobs simply by providing funding to private industry to build renewable or at least domestic energy infrastructure.
Improvement in the real estate markets has already started. TARP money should be used to buy distressed properties. Valuations for these properties should be close to Market but having a guaranteed buyer would stabilize those prices. The houses should then be returned to the marketplace at a rate that doesn't cause a further collapse in values. I believe that speculators would be found to buy these houses with the hope of increases. I also believe this was the original intent of the Troubled Asset Relief Program. Yes this interferes with the market, but we have had a tremendous economic crisis that requires Government intervention. I think the cost of this type of TARP program may actually turn out to be much less than anticipated as the assets will start to increase in value. However, getting them revalued to appropriate levels and back into the marketplace with stable mortgages returns them to the tax rolls.
The current stimulus efforts are directed at symptoms and not root causes. Providing people on Social Security a $300 stimulus check adds up to a lot of money in the aggregate, but not very much to each individual. What are they going to spend it on? First the check went into their direct deposits. Second, they live on a monthly budget and the extra $300 or $600 for a couple is probably not going to inspire them to run out and buy a new car and the odds are they aren't that into smart phones. Since the money wasn't enough to do much for them, it simply stayed in the bank to cover potential increases in health costs, taxes and/or any number of rainy day possibilities. The fact that economists were surprised, if they were, that the money was reflected as higher savings vs higher spending for the most part is what surprises me.
Also, instead of focusing on what should be and I believe will be our new growth industry in renewable energy, money is being given to protect a relatively small number of jobs in politically significant but economically neutral legacy industries. We are not going to see significant new job growth in the auto related industries. We may see some, but new plants will make better use of robotics and there is going to be fewer cars sold as Americans will be thriftier in the near term, keeping old cars longer. If we were to invest the same amount of money in either converting coal to oil, increasing wind and solar, increasing use of natural gas and increasing the use of ethanol, it would create new jobs, improve spending and reduce our balance of trade and dependence of foreign oil. This is a cumulative impact since every equivalent barrel of US energy we use means we need one less imported. Further it would start to position the US towards the future. We need to get to a fully carbon neutral renewable energy future and we need to start getting there now, but smartly.
The current bill that wants to use CAP and TRADE is a heavily compromised attempt to move in the right direction but is probably doomed. It is hoped that the bill will lead to increased jobs but we can get to increased jobs simply by providing funding to private industry to build renewable or at least domestic energy infrastructure.
Improvement in the real estate markets has already started. TARP money should be used to buy distressed properties. Valuations for these properties should be close to Market but having a guaranteed buyer would stabilize those prices. The houses should then be returned to the marketplace at a rate that doesn't cause a further collapse in values. I believe that speculators would be found to buy these houses with the hope of increases. I also believe this was the original intent of the Troubled Asset Relief Program. Yes this interferes with the market, but we have had a tremendous economic crisis that requires Government intervention. I think the cost of this type of TARP program may actually turn out to be much less than anticipated as the assets will start to increase in value. However, getting them revalued to appropriate levels and back into the marketplace with stable mortgages returns them to the tax rolls.
Sunday, June 28, 2009
Recovery vs Rebound
We all are aware that the economy has had a massive correction in which we had tremendous asset revaluations in housing and the stock market. There are sign that the bottoms have been reached and that we are looking at the end of the recession and the start of the recovery. However, some who hear this act as if the economy was about to rebound back to its former levels. This is extremely unlikely to happen and what we should expect is fairly slow growth.
The primary reason for this is that housing values have shrunk so much. I read a number of economic papers this weekend arguing over whether housing wealth impacted consumer spending. One study said it did not, but briefly acknowledged that while wealth in housing was somewhat locked, it was possible that there was a secondary effect related to borrowing against that wealth. With all due respect to the authors of that study, no one goes out and spends their houses. Spending has been directly related to growth in apparent wealth related to either refinancing, HELOCs or trading up. This money has fueled the consumer driven economy and unless housing prices were to rebound, it is not coming back.
There is another impact, but possibly one that will settle itself down. Some of the areas heavily impacted by the housing crisis were areas in Florida and Arizona, as well as California and Nevada. Now, as far as Florida and Arizona go, there has been a long range trend where retirees sold homes in the north and purchased homes and/or condos in those areas. This has slowed down tremendously because retirement rates are down and people feel that the prices for their northern homes are too low for them to sell. However, clearly the relative value of homes in much of the North has actually increased in comparison to homes in Florida and Arizona and when this gets marketed properly, assuming there are buyers for the Northern homes, we may see a resumption of that trend (retirees fueling home buying in Florida and Arizona).
Let me return to the main point I was making. Real estate values are widely depressed, but as always it has to do with location. However, the wealth lost is simply not coming back quickly. Now, for those who didn't actually lose their homes, this may be worse than it is for those who did.
Suppose you have a house that has been finance at the 80% level in an area that has seen prices drop by about 20%. Well at this point you have no equity but you are not underwater. Even if you go slightly underwater or maintain a small amount of equity, you cannot refinance and it will probably take a rebound in prices to a level above previous ones to be able to "mine" your home for spending or retirement money. Since this is probably unlikely for a number of years, the only available spending is discretionary earnings and other forms of credit. I could develop a mathematical formula for this, but trust me, it is a lot less available for spending.
Now suppose you lost a house or never had one. You, assuming you can get credit and a down payment have the opportunity to buy the same or similar house for a lot less and start off with say 20% in equity. Even a modest increase in price may provide you with a source for home equity loans or refinancing. However, it is not going to match prior spending levels when you consider the slow increase in housing prices and those who have lost their equity positions.
So, if we have lost x amount of housing wealth (equity) and therefore have lost the spending from loans associated with that amount the only way to replace it is by restoring that wealth. Well, I can find no scenario where that is going to happen quickly.
So, our consumer driven economy has no potential to "rebound". It will start to recover meaning that having reached a level of GDP significantly lower than it was, we will see it increase slightly. This growth will require adjustments to a reduced level of economic activity until we fix the energy sector and grow our renewable energy industry.
The primary reason for this is that housing values have shrunk so much. I read a number of economic papers this weekend arguing over whether housing wealth impacted consumer spending. One study said it did not, but briefly acknowledged that while wealth in housing was somewhat locked, it was possible that there was a secondary effect related to borrowing against that wealth. With all due respect to the authors of that study, no one goes out and spends their houses. Spending has been directly related to growth in apparent wealth related to either refinancing, HELOCs or trading up. This money has fueled the consumer driven economy and unless housing prices were to rebound, it is not coming back.
There is another impact, but possibly one that will settle itself down. Some of the areas heavily impacted by the housing crisis were areas in Florida and Arizona, as well as California and Nevada. Now, as far as Florida and Arizona go, there has been a long range trend where retirees sold homes in the north and purchased homes and/or condos in those areas. This has slowed down tremendously because retirement rates are down and people feel that the prices for their northern homes are too low for them to sell. However, clearly the relative value of homes in much of the North has actually increased in comparison to homes in Florida and Arizona and when this gets marketed properly, assuming there are buyers for the Northern homes, we may see a resumption of that trend (retirees fueling home buying in Florida and Arizona).
Let me return to the main point I was making. Real estate values are widely depressed, but as always it has to do with location. However, the wealth lost is simply not coming back quickly. Now, for those who didn't actually lose their homes, this may be worse than it is for those who did.
Suppose you have a house that has been finance at the 80% level in an area that has seen prices drop by about 20%. Well at this point you have no equity but you are not underwater. Even if you go slightly underwater or maintain a small amount of equity, you cannot refinance and it will probably take a rebound in prices to a level above previous ones to be able to "mine" your home for spending or retirement money. Since this is probably unlikely for a number of years, the only available spending is discretionary earnings and other forms of credit. I could develop a mathematical formula for this, but trust me, it is a lot less available for spending.
Now suppose you lost a house or never had one. You, assuming you can get credit and a down payment have the opportunity to buy the same or similar house for a lot less and start off with say 20% in equity. Even a modest increase in price may provide you with a source for home equity loans or refinancing. However, it is not going to match prior spending levels when you consider the slow increase in housing prices and those who have lost their equity positions.
So, if we have lost x amount of housing wealth (equity) and therefore have lost the spending from loans associated with that amount the only way to replace it is by restoring that wealth. Well, I can find no scenario where that is going to happen quickly.
So, our consumer driven economy has no potential to "rebound". It will start to recover meaning that having reached a level of GDP significantly lower than it was, we will see it increase slightly. This growth will require adjustments to a reduced level of economic activity until we fix the energy sector and grow our renewable energy industry.
Saturday, June 27, 2009
Climate bill?
The House today narrowly passed the Climate Bill. This bill is basically an attempt to reduce environmental pollution by putting a cap on hot house gas emissions and taxing anyone who exceeds the limits. Ultimately any costs will be passed on the the American taxpayer although it includes some provisions designed to help lo income consumers.
There is tremendous opposition to this bill and its chances in the Senate are far from certain. The question has to be whether the cost to reduce carbon emissions is less that the cost of buying carbon credits. Effectively, if you can reduce your emissions, you get a cap credit that you can sell. Like everything else some will benefit and some won't. It also raises the question as to whether it will have a net impact of more jobs or less jobs. As constituted it seems to do a number of things that I don't think are beneficial for the economy.
First, it penalizes coal, one of our greatest resources. Now I understand that we would like to reduce hot house gas emissions and coal is potentially the worst offender, but I think the legislation should have been drafted to help reduce reliance on foreign oil to a greater extent. If you really would like a cleaner energy future, the best way to go would be to tax foreign oil and use that money to subsidize conversion of electric plants to natural gas, and using coal to produce synthetic oil. Ultimately we do need to move to renewable energy and the policies should be geared that way, but it is pretty unlikely that wind and solar will ever be at a stage where they do not need a backup generating capacity for, well, cloudy or calm days.
Second, it has a ton of concessions designed to win votes that twist the bill into a bit of a political nightmare. Some of these aren't even fully disclosed right now. All bills like this have compromises but the desire to pass this was so intense and its chances so slim that the concessions reached epic proportions.
It is a sad thing in this country that we can't achieve a meeting of the minds on what seem fairly clear and common issues. The great majority of Americans would like to reduce environmental contamination and would like to reduce reliance on foreign oil. I don't have confidence that this bill does either of those things very well and is therefore flawed from the outset. However, instead of taking the time to craft a bill that accomplishes those two objectives, with a clear additional objective of creating a renewable energy growth industry in this country, politicians tie themselves up a belief that if they don't accomplish something right now, they may never be able to.
When some of our leading environmental groups oppose the bill, you have to believe it has real problems, lets hope it fails and we rethink the approach.
There is tremendous opposition to this bill and its chances in the Senate are far from certain. The question has to be whether the cost to reduce carbon emissions is less that the cost of buying carbon credits. Effectively, if you can reduce your emissions, you get a cap credit that you can sell. Like everything else some will benefit and some won't. It also raises the question as to whether it will have a net impact of more jobs or less jobs. As constituted it seems to do a number of things that I don't think are beneficial for the economy.
First, it penalizes coal, one of our greatest resources. Now I understand that we would like to reduce hot house gas emissions and coal is potentially the worst offender, but I think the legislation should have been drafted to help reduce reliance on foreign oil to a greater extent. If you really would like a cleaner energy future, the best way to go would be to tax foreign oil and use that money to subsidize conversion of electric plants to natural gas, and using coal to produce synthetic oil. Ultimately we do need to move to renewable energy and the policies should be geared that way, but it is pretty unlikely that wind and solar will ever be at a stage where they do not need a backup generating capacity for, well, cloudy or calm days.
Second, it has a ton of concessions designed to win votes that twist the bill into a bit of a political nightmare. Some of these aren't even fully disclosed right now. All bills like this have compromises but the desire to pass this was so intense and its chances so slim that the concessions reached epic proportions.
It is a sad thing in this country that we can't achieve a meeting of the minds on what seem fairly clear and common issues. The great majority of Americans would like to reduce environmental contamination and would like to reduce reliance on foreign oil. I don't have confidence that this bill does either of those things very well and is therefore flawed from the outset. However, instead of taking the time to craft a bill that accomplishes those two objectives, with a clear additional objective of creating a renewable energy growth industry in this country, politicians tie themselves up a belief that if they don't accomplish something right now, they may never be able to.
When some of our leading environmental groups oppose the bill, you have to believe it has real problems, lets hope it fails and we rethink the approach.
Friday, June 26, 2009
Fed circus?
One of the great benefits of living in a country like the United States is the great entertainment value that political maneuvering can provide. Yesterday, we watched an oversight committee attempt to get Fed Chairman Ben Bernanke to admit to some sort of wrong doing in regard to the Bank of American takeover of Merrill Lynch.
I didn't intend to watch the whole thing, but it was so silly and amusing that I couldn't help myself, although I did leave from time to time to do some yard work. Luckily, the proceedings were so limited and redundant that I never felt I missed much.
What did we find out? Well since most of us already know that most politicians are secretly clowns, not much. Apparently they are surprised by the following.
1. People who work for Bernanke or the Fed write e-mail that express opinions.
2. People trying to negotiate high level deals use all sorts of tactics.
3. There is reason to question the competence of Bank of America business executives (and in fact most of the banking industry).
4. Just because you blurt out a stupid question doesn't mean you will get a stupid answer.
5. When all else fails ask for every document that might have ever existed about the deal.
6. If you are hoping to get any press or TV time from a silly hearing like this, make sure you don't conflict with the death of a Pop Superstar.
7. If you are going to make allegations based on old e-mails, have your staff check to see if the author has written or said anything more recently that contradicts your point.
8. The hearings may have contributed to the stock market and bond rally that were going on at the same time, so from that perspective they may have had some value.
9. Since it is generally accepted that the deal ended up being a good thing, diving into the process that led to it has little to no benefit if you can't demonstrate some law was broken.
10. Clueless people aren't even very good at 20-20 hindsight.
I didn't intend to watch the whole thing, but it was so silly and amusing that I couldn't help myself, although I did leave from time to time to do some yard work. Luckily, the proceedings were so limited and redundant that I never felt I missed much.
What did we find out? Well since most of us already know that most politicians are secretly clowns, not much. Apparently they are surprised by the following.
1. People who work for Bernanke or the Fed write e-mail that express opinions.
2. People trying to negotiate high level deals use all sorts of tactics.
3. There is reason to question the competence of Bank of America business executives (and in fact most of the banking industry).
4. Just because you blurt out a stupid question doesn't mean you will get a stupid answer.
5. When all else fails ask for every document that might have ever existed about the deal.
6. If you are hoping to get any press or TV time from a silly hearing like this, make sure you don't conflict with the death of a Pop Superstar.
7. If you are going to make allegations based on old e-mails, have your staff check to see if the author has written or said anything more recently that contradicts your point.
8. The hearings may have contributed to the stock market and bond rally that were going on at the same time, so from that perspective they may have had some value.
9. Since it is generally accepted that the deal ended up being a good thing, diving into the process that led to it has little to no benefit if you can't demonstrate some law was broken.
10. Clueless people aren't even very good at 20-20 hindsight.
Thursday, June 25, 2009
Financial Salary Bubble?
Today we are going to get a display of political outrage over something that may or may not have happened when Bernanke will get grilled and apparently accused of acting inappropriately during discussions with Bank of America over the Merrill Lynch takeover.
This really seems like a non-event, because the "outrage" over the fact that implicit or implied threats were levied to make the deal happen is clearly part of any difficult negotiation. Now, one can argue if this was the only or even the best solution to the financial crisis that was happening at the time but considering the seriousness of the situation when some were predicting financial Armageddon, strong words were probably to be expected.
Watching the republican congressman talk last night, he is trying to make the point that the Government's involvement was somehow inappropriate, since we should have let the free markets handle the crisis. How ludicrous that argument is. The reason for the crisis was the unbridled greed culture of the "free markets" and the lax regulations that allowed extremely high risk instruments to be created and traded so widely since they generated tremendous apparent profits.
It really is hard to believe that these financial professionals could have been as clueless as they now claim about the real risks of these instruments. They probably didn't really care as long as they had "big" profits and "big" bonuses in the immediate year. I doubt they expected the house of cards to come tumbling down the way it did, but really were these people all that much different than Bernie Madoff? OK, Madoff actually knew what he was doing was illegal but I bet he hoped for a financial miracle that would allow him to set things right. The people generating and peddling these credit instruments had to know they depending on asset valuations continuing up forever. Everyone was going to make more and more money because everything was going to get more and more valuable? Did they really believe that?
One of the things you see discussed on some financial shows is how they have to pay high salaries and bonuses in order to keep talent. I don't want to say that many of the people working in the financial markets aren't bright talented people. I'm just not sure they are any brighter or more talented than the people in any other profession. They may be a lot greedier, I think that has been demonstrated. However, they think they are entitled to big salaries for the same reasons professional athletes think they are, it has become the norm. The big difference is that professional athletes have demonstrable skills that most of us don't. I haven't seen that in the financial professionals. Maybe its time to burst that salary bubble?
This really seems like a non-event, because the "outrage" over the fact that implicit or implied threats were levied to make the deal happen is clearly part of any difficult negotiation. Now, one can argue if this was the only or even the best solution to the financial crisis that was happening at the time but considering the seriousness of the situation when some were predicting financial Armageddon, strong words were probably to be expected.
Watching the republican congressman talk last night, he is trying to make the point that the Government's involvement was somehow inappropriate, since we should have let the free markets handle the crisis. How ludicrous that argument is. The reason for the crisis was the unbridled greed culture of the "free markets" and the lax regulations that allowed extremely high risk instruments to be created and traded so widely since they generated tremendous apparent profits.
It really is hard to believe that these financial professionals could have been as clueless as they now claim about the real risks of these instruments. They probably didn't really care as long as they had "big" profits and "big" bonuses in the immediate year. I doubt they expected the house of cards to come tumbling down the way it did, but really were these people all that much different than Bernie Madoff? OK, Madoff actually knew what he was doing was illegal but I bet he hoped for a financial miracle that would allow him to set things right. The people generating and peddling these credit instruments had to know they depending on asset valuations continuing up forever. Everyone was going to make more and more money because everything was going to get more and more valuable? Did they really believe that?
One of the things you see discussed on some financial shows is how they have to pay high salaries and bonuses in order to keep talent. I don't want to say that many of the people working in the financial markets aren't bright talented people. I'm just not sure they are any brighter or more talented than the people in any other profession. They may be a lot greedier, I think that has been demonstrated. However, they think they are entitled to big salaries for the same reasons professional athletes think they are, it has become the norm. The big difference is that professional athletes have demonstrable skills that most of us don't. I haven't seen that in the financial professionals. Maybe its time to burst that salary bubble?
Wednesday, June 24, 2009
Trends
In order to have a trend you need a number of data points. If you only have a single data point, you don't have a trend. Now, every trend has to start somewhere and if you have reason to believe a trend is about to start, you can take a chance that the single point is the start, but that is akin to gambling.
If you look at the stock market over time, you can certainly see broad trends. However, during each of those trends there are short periods where the trend is reversed for one or more sessions. So every bull market has short periods of correction and every bear market has short rallies.
Since March we have had a clear upward trend based on expectations that a recovery will be coming. Over the last week there has been either a reversal or a correction, or is this a period where we will tread water until there is better economic data?
I believe that there are enough indications of a recovery that the market will resume its upward movement. I do think that this summer may be one where we have some upward and downward movement because of low volume and therefore somewhat exaggerated movement when it is fairly easy to have more buyers than sellers or vice versa on any given day. Also, it gives the economic data time to mature.
Only time will tell.
If you look at the stock market over time, you can certainly see broad trends. However, during each of those trends there are short periods where the trend is reversed for one or more sessions. So every bull market has short periods of correction and every bear market has short rallies.
Since March we have had a clear upward trend based on expectations that a recovery will be coming. Over the last week there has been either a reversal or a correction, or is this a period where we will tread water until there is better economic data?
I believe that there are enough indications of a recovery that the market will resume its upward movement. I do think that this summer may be one where we have some upward and downward movement because of low volume and therefore somewhat exaggerated movement when it is fairly easy to have more buyers than sellers or vice versa on any given day. Also, it gives the economic data time to mature.
Only time will tell.
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