What's Going Well, and What's Not

The Wall Street Journal has an interesting article on the increase in exports from the US in today’s paper.  Also, they have this nifty interactive graphic that shows what areas of the US are benefiting most from exports.

Exports are a key to the new US economy.  Even though the dollar has rallied recently, it has become cheaper to manufacture many things in the US because the dollar is a lot cheaper than it was one to five years ago.  That makes US wages cheaper, and American workers are among the most productive in the world.

That’s the bright side of the US Economy, and it influences how I invest.  I pay more attention to global demand than to US consumer demand.

But now for the worries.

• Money supply growth is anemic.  The Fed is not pushing on a string; the Fed is not pushing.  What strength they have is being directed toward solving financial market problems, not toward stimulating the US economy.  Banks are not expanding credit because they can’t afford to do it.
• Residential real estate prices are likely (in my opinion) to fall another 10-20% across the US over the next two years.  That mortgage rates have fallen is a small help, but not enough to fundamentally change the situation.
• The investment banks have cleared away some of their troubles, but they are still opaque, and their derivative books are possibly mispriced as a group.  Level 3 assets as a fraction of equity must come down.
• Well, credit spreads have risen, but aside from financials, where are the junk bond defaults?  We had a ton of weak single-B and CCC issuance — where are the defaults?
• There are a variety of weak finance companies that suffer in this environment, mostly due to their own foolishness: Chrysler, Ford (F), GM (GM), AIG (AIG), mortgage insurers, and financial guarantors.

You’ll note that I have focused on financials.  That’s because in a credit-driven economy, if they are sick, then most of us are sick.

Regarding the fall in mortgage rates, that’s a good thing for financials, except that lending standards have tightened.  When we talk about the Fed “pushing on a string,” it means that when the banks are weak, lowering rates doesn’t do much; they can’t lend more because their balance sheets are weak.  With lower mortgage rates and tighter lending standards, the “pushing on a string” phenomenon reappears.  There aren’t that many people who can benefit from the lower rates, because many marginal buyers don’t have the wherewithal to meet the new lending standards.  That will change over time.  Indeed, when the Fed “pushes on a string” eventually their power is seen, delayed, but with a vengeance.  The same is true here, if mortgage rates stay low for long enough.

Things aren’t as bad as the bears put out, and are not as good as the bulls put out.  The economy is muddling with flattish growth as far as the average consumer sees, even if some export sectors are doing well.  That’s how I see it, and simplistic words like “recession” only cloud the picture.

Comments

[phdinsuntan...:]

``We have no plans to insert money into either of those two institutions.''
then fannie and fredie...
``We have no plans to insert money into either of those two institutions.''
now wamu and leh?
``We have no plans to insert money into either of those two institutions,''
F, GM, AIG next?

2008 Sep 11 09:34 AM

[MarvinMBA:]

One of the things that will stimulate the economy is to subcontract with Chinese manufacturers to assemble shoes, clothing and household articles here in this country for export to China. At the rate were going this is in the cards...wake up America!!!

2008 Sep 11 11:01 AM

[Jason Rines...:]

Private equity will step in on manufacturing, energy and infrastructure here in the US (with i-Banks already putting together about $250 B for infrastructure). None of this will happen until the election is over and investors can see what economic policies will come out of Washington by the end of Q1. This was shameful of this Congress to not work at all with the Bush Admin on very good plans for some of this to occur this year. Hating Bush and loving themselves more then they love America is a real problem these days. But nonetheless, I believe we will see broad cooperation early next year. The House is feeling real pressure and knows pitchforks are coming soon if they don't begin playing ball with the American people. Dirty bastards.

2008 Sep 11 11:45 AM

[Jason Rines...:]

Hey Paul and Harky, that was a VERY disrespectful message to this writer. I don't agree with too much from Mr. Merkle but if you don't like his writings, why do you come and post on it? I could care less about Rolex, yachts or anything else but investments and consistently providing for my family, but having one of these things does not make you a caliber gentlemen. Begin acting like one please.

2008 Sep 11 11:48 AM

[Oregonrain:]

I agree with iTHink....would hate to see this board decent into mindless name calling...

2008 Sep 11 11:54 AM

[sickofthehype:]

Most men with a Rolex and a Mercedes bought them on credit and/or a lease. But regardless, most who own them justifiably generally have the writing skills of someone with an education. I think it's quite ironic that the one bad apple on here making comments, is also the one with zero grammar skills. Ain't that right?

2008 Sep 11 12:05 PM

[Jake2:]

"would hate to see this board decent into mindless name calling..." I agree with this but the problem is life is short and long-winded sometimes pretentious writers such as Merkel don't really have much to say. Reader, pass them by.

2008 Sep 11 12:11 PM

[veryold:]

that ignorant tirade adds nothing to the discussion

2008 Sep 11 02:25 PM

[Jason Rines...:]

I reported the abuse, almost every post by this user is either self-edification or name calling. Investors are normally net-out sensitive, I am the same way. But Paul & Harky's consistent poor behavior adds nothing of any value and belittle's all individuals attempting to educate here.


On Sep 11 11:54 AM oregonrain wrote:

> I agree with iTHink....would hate to see this board decent into mindless
> name calling...

2008 Sep 11 03:25 PM

[SA Editor M...:]

Paul & Harky has been banned from this site and his comments removed. If you see him appearing in any variation of that name, please report abuse immediately.

2008 Sep 11 05:44 PM

[woodsey:]

Peace!

2008 Sep 12 11:19 AM

[Fabien Hug:]

I like Merkel

2008 Sep 12 02:38 PM