Donald Trump - Bah Humbug! Buy, Buy, Buy!

Donald Trump was just on CNBC saying that he longs for the days of Alan Greenspan. He believes that Ben Bernanke has held short rates too high too long. He went on to say that Ben should hold an emergency meeting of the FOMC to cut interest rates. He believes that the coming recession could be one of the worst in a long time.

The President of the Federal Reserve Bank of Richmond wrote a nice rebuttal to Trump's tirade. It was published as the President's message in the "RegionalFocus," spring of 2007. The summary point of the article was, "Monetary policy works best when it allows the real economy to respond appropriately to economic fundamentals, rather than attempts to insulate the economy from shocks by tolerating swings in inflation."

Ben could have lowered rates to "fix" the sub-prime problem. This would have been like castrating a dog to prevent breeding. Ben has injected reserves into the system so that those who are running scared can hoard all the cash they want at relatively low market returns. Neither the fed funds rate nor the discount rate was changed. In a few more months, Ben will be getting high praise for standing firm in order to bring inflation expectations to very attractive levels.

In the meantime, "talking heads" will continue to make "much to do about nothing."

I like optimistic people. A few of my favorite optimistic friends are Don Hayes, Brian Wesbury, Jerry Bowyer and James Pethokowkis. This morning Don Hayes wrote that the "common sense" of the talking heads is "short term thinking common sense." Their "wise" council during turbulent times is to "raise cash, get defensive, and stress quality." He notes that he learned a lesson in 1974 when long term common sense was to BUY, BUY, BUY, while others were using short term common sense.

Jerry Bowyer wrote yesterday about the "sub-prime mess." He notes that of the 44 million mortgages in America, 14% are sub-prime. Of those, 13% are currently at least one payment behind, however, the large majority of the late payers are still paying and many are working with lenders to restructure payments. The bottom line is that there are about 250,000 mortgages that are moving to foreclosure. The total value of these loans is about $7 billion. If these houses are worth 30% less than what is owed, the total money lost will be in the neighborhood of $2B. Americans have net worth of $53 trillion dollars. The "total hit" will be in the neighborhood of .003% of value. Oh, my! Lions and tigers and bears!

The good news is that the baby gets thrown out with the bath water during times like these. This is good news because smart investors can pick up babies on the cheap during times like these.

IS THE PRICE PRESSURE COMING OFF THE OIL MARKET? What if the current weakness in oil were to persist? Based on current market prices, the price of gasoline will be down to $2.50 within a week or two. Based on current jet fuel prices, Continental Airlines, Inc. (CAL) will save about $360 million dollars on fuel over the next year (about $3.24 per diluted share). Is the "roll over" or "rotation" finally here?

Over the past 21 days, the XAL (airline index) has fallen 8.99%. During the same time the XOI, oil index, has fallen 13.24%, the XBD, broker dealer index, has fallen 14.16% and the BKS, bank stock index, has fallen 7.88%. This sure looks like a classical mid cycle rotation, but as always, we will not know for sure until after it is well underway. If Big Ben had "chickened out" and cut rates, then I would have to say that the price of commodities might take off again. However, Ben has been as solid as a rock. He has fed the markets enough cash to allow the markets to work. He has not driven down the price of money, thus he has avoided stoking inflation and he is thus setting us up for a very strong second half cycle.

The second half of the business cycle is the time of small business expansion. The first half of the cycle is all about recovery from the worst of the prior downturn. During the second half, those businesses that have done well during the recovery will borrow to expand. Business lending is the mother's milk of profits for the average bank. During the past few years, the big investment banks (broker dealers) have had a fun ride. In recent days, they have been routed. Again, the entire index is off 14.16% during the past 21 days. Take advantage of the turbulent markets to add money to your accounts. It is time to do some BUYING!

Market Psychology

A major reason to buy now is because market psychology indicators are screaming BUY, BUY, BUY. I will not go over the indicators in detail, but they show that emotional, trend traders who typically have a lot of short term fun at major turns are as "tilted" as they have been in a long while. These traders make money for a while and then lose their collective shirts when the new trend takes off.

Brian Wesbury wrote a nice piece for the Wall Street Journal yesterday. In it, he pointed out that while the overwhelming majority of professional forecasters see no recession soon, the majority of Americans believe we are already in a recession. Indeed, the public is fed such a rich diet of gloom and doom by the media that they hold a negative bias about the state of the world. Even a majority of the 64% who say they have personally never been better off, say that the world is falling apart.

Brian makes the excellent point that even the shows that "present the fair and balanced" point of view, tend to always have a "bull" and a "bear" debate. The more appropriate debate should often be how to make money now, versus am I going to win or lose. Market investors who stick to the task at hand consistently make money.

Making money this week, month or year is far more doubtful than making money this decade. We are living through exciting times.

James Pethokowkis is correct that there is a risk that we will be pulled off course by vote-hungry politicians. Yesterday, I enjoyed his comments about the "broken window fallacy" trap that Hillary Clinton is willing to lead us into. In this case, Hillary wants to spend a lot of money to "fix" global warming. She talks about a "win-win" scenario. Ironically, she recently voted against the trade deal with Columbia that would have provided a "win-win-win." In her version of a win-win, she would tax Americans directly and indirectly to reduce global warming. She thinks that all the government spending to fix the problem would create lots of jobs and she is correct on this point. The problem is that the jobs thus created would not be equal to the jobs created if the free market were allowed to "fix" the same problem.

HOW MANY TIMES DO WE NEED TO LEARN THE LESSON THAT GOVERNMENT IS NOT AN EFFICIENT CREATOR OF JOBS!

Big Businesses and Politicians

Soon, politicians will attempt to pass laws to "fix" the energy "crisis." The most common "democrat" solution is a cap and trade system for pollution. This is nothing more than another opportunity for big business to win special favors by spending big bucks to lobby politicians.

If we seriously want to curtail energy use, a tax increase on fuel usage should be passed. It should be offset by an equal tax credit for health care or reduced income taxes. NO MORE BIG GOVERNMENT. WE ALREADY HAVE DEMOCRAT AND REPUBLICAN BRIDGES TO NOWHERE!

Got to run. Bye, buy, buy . . . .

Comments

[phdinsuntan...:]

lower US interest rates = $ 100+/barrel oil = inflation+recession+Ha... Trumps !
higher US interest rates = cheaper oil +strong US$ = cheap houses and Trump FIRED!

2007 Aug 11 10:23 AM

[silverbullet:]

I have two issues with this article. First of all there are many mortgages that are not sub-prime that are in danger of foreclosure. These mortgages started off with low rates for a few years and are expected to adjust this year and then next 2 years. Many of those people spent too much of their budgets for housing.

The second issue involves the market "fixing" our global warming problem. There are certain aspects of our economy that fall into the category of market failure. Corporations do not absorb the cost of the pollution they create. Neither do we consumers absort that cost. These costs are market externalities. To say that the free market will pay for these external costs is tantamount to saying that the free market can create and pay for a fire department or an army.

2007 Aug 11 01:12 PM

[kurt walter:]

Trump wants lower interest rates because he has many residential units to sell. NO TAXPAYER BAILOUT. There is risk in every investment. If you know taxpayers will bail you out, you take even more risk in the future. Greenspan made rates so low, anyone with a heart beat could get an exotic, risky, adjustable rate mortgage loan and purchase a home they really couldn't afford in normal historical conditions. That caused a major real estate/credit bubble. The real estate speculation was similar to the internet stock madness in the 1990s. It was just a matter of when not if the bubble would burst. Luckily, unemployment is only 4.6%. This current mess would be much worse with higher unemployment. Let market forces and supply and demand sort the mess out. Don't manipulate interest rates or use taxpayer money to save those that took the risk and got burned. Let them take personal responsibility for their actions. Stop asking taxpayers to cover speculators foolish errors. Remember, current political hacks just want to get elected. They will say anything for your vote. "How much taxpayer money that pays for useless social programs can I give you for your vote"? It is sick. Nothing but a bunch of pandering political hacks.

2007 Aug 11 01:57 PM

[Preshit Mulay:]

Very Well said Kurt.

2007 Aug 11 07:14 PM

[Ax:]

Oh well, let's just be optimists... seems to be the tune of this article, since the author likes "optimistic people. A few of (his) favorite optimistic friends are Don Hayes, Brian Wesbury, Jerry Bowyer and James Pethokowkis."

So just because an optimist like Bowyer writes that out of 44 million mortgages, 14% are subprime and 13% of them are delinquent (at least a month behind) - you just ignore the ALT-A mortgages?

This is really some piece of math. There are only 250.000 problematic mortgages... out of 44 million? The 107 imploded mortgage lenders that imploded since the end of last year - were really complete idiots to get some of that 250.000 mortgages in their accounting books. Let's not forget 2 of them were on the list of the 20 biggest in the US.

But hey! Who cares about problems in the Alt-A sector and even prime! ALT-A is only another 20% of the mortgage market!

Just because the writer is an optimist it doesn't mean you gave to believe everything he writes!

You know, Adolph Hitler said he'll conquer Russia in three months! He was an optimist too... and utterly wrong.

2007 Aug 11 02:41 PM

[Sol Rosenberg:]

Can you explain exactly how "inject[ing] reserves into the system" "bring[s] inflation expectations to very attractive levels"?

The new money has to go somewhere.

The fact is both Trump and Bernanke are inflationists. They just disagree on how quickly to debase the dollar.

2007 Aug 11 06:12 PM

[elwind45:]

just couple of more months and alot of your smart financial type buds are toast. enjoy!

2007 Aug 11 06:23 PM

[Genecis:]

Unfortunately "global Warming" can't be "fixed." We'll just have to ride it out until the sun completes its current cycle.

Quote of the day:
"Brian Wesbury wrote a nice piece for the Wall Street Journal yesterday. In
it, he pointed out that while the overwhelming majority of professional
forecasters see no recession soon, the majority of Americans believe we are
already in a recession. Indeed, the public is fed such a rich diet of gloom
and doom by the media that they hold a negative bias about the state of the
world. Even a majority of the 64% who say they have personally never been
better off, say that the world is falling apart."

Doom da doom doom!

2007 Aug 12 10:21 AM

[Living Off ...:]

i read somewhere that the government currently employs 1% of the US
population.

Sounds like Billary wants to keep increasing that number. Eventually all
US jobs will be government jobs. Isn't that what happens in a communist
state?

Doesnt' it follow that Billary is communist? ;-)

2007 Aug 12 03:54 PM