James Wood

Root Cause of the Recession: Bad Consumer Credit

A critical piece of logic in this article is that deflation is really mathematical. Reduce the total money suply for a fixed of amount of assets, and prices will go down. While it is true there is a lot of money outside the US, most of these markets are having the same problems as the US. This is particularly true of Europe. Spain,England, Ireland have the same and even worse problems in real estate. Much of Europe has lent heavily to Eastern Europe, partiuclary Austria and Germany, where there is soon to come much loss on these loans. Only in Asia, partiuclarly China, and perhaps Brazil, do we see signs of realtively early recovery and lesser losses going forward. On balance, the rest of the world will reinforce, not short term reduce, the deflationalry effect on the US.


On Jul 26 04:21 AM Dave Wrixon wrote:

> "This has important consequences in coming months for the value of
> all asset classes, including housing, commercial real estate, gold,
> oil other commodities as well as stocks and bonds. This has important
> consequences in coming months for the value of all asset classes,
> including housing, commercial real estate, gold, oil other commodities
> as well as stocks and bonds."
>
> This statement simply ignores the existence of other economies, the
> demand they have have on global resources and the impact on foreign
> exchanges, and in turn the impact that will have on the US internally.

Eliminating Asset Class Choices: Understanding the Big Picture

The article is well done in terms of listing options for asset classes. However, the author seems to consider only long positions. If the author would consider both long and short positions, he might find himself coming to different conclusions.

Obama Wants a 'Better Plan'? Here's One: Bite the Bullet

Your question is very legitimate. The commercial real estate market is going into the tank and there is a strong holdover of unresolved mortgage credit in the regional banks. However, the "falling shoe" which most concerns me is the derivatives exposure (particularly the CDS's and interest rate swaps) which are most centered in the big banks, hedge funds, private equity and investment banks. Judging by the FED's actions, it is this type of problem that they are most worried about. If this "shoe drops", we have truly systemic risk to the system and we are faced with a much graver set of circumstances to deal with. In this scenario, the regional banks have a much better chance of surviving without government aid.


On Apr 05 08:42 AM old trader wrote:

> "I would submit if we solved Citi and B of A and maybe Wells Fargo
> and JP Morgan, the FDIC could deal with the rest. We have many strong
> regional banks which will quickly step up to play major roles in
> banking that are not burdened with the enormous problems of the largest
> banks."
>
> Mr. Wood,
>
> I'm no big fan of the current stimulus plan(s), and agree we're at
> risk of our own "Japanese decade" (or worse), but I'm not certain
> how many "strong regional banks" there are to step up to the plate.
> Granted, they avoided getting involved with many/all of the exotic
> debt instruments that plague the bulge bracket banks, but they were
> certainly big players in the CRE market, and that particular shoe
> is looking like its starting to drop.

How Ken Lewis Has Failed the Test of Good Leadership

The three people commenting on this article refer to the issue if the government forced B of A to buy Merrill "for the good of the country". Once Mr. Lewis discovered what he had got his bank into, he wanted out and at that time the government did pressure him to go through with the deal. However, the initial decision to buy both Country Wide and Merrill were decisions taken by Mr. Lewis without any pressure from the government. The enormous loss suffered by the shareholders of B of A would have been much less if neither of these voluntary decisions were taken by Mr. Lewis.

The Coming Depression: See It Clearly Through Historical Eyes

Thanks for the article recommendation. It is a great article and required reading for anyone who wants to understand the problems CDS's are having in a technical sense. You may enjoy a new article I have coming out later today on CDS's and AIG.


On Feb 24 09:49 AM igriot wrote:

> Great article. We obviously need more historical perspective. Have
> you read Recipe For Disaster: The Formula That Killed Street? www.wired.com/techbiz/...

The Coming Depression: See It Clearly Through Historical Eyes

You suggest (fairly) my last line is ambiguous in that there is no clear relationship between the article and the success or failure of the Obama government stimulus plan. Let me provide some clarification.

The thrust of the article is that business cycles busts are usually created by excesses of money creation, new financial instruments which facilitate the money creation and decreasing credit quality. There is historical statistical and descriptive evidence to support this position, which the article briefly refers to, but which is amply supported from numerous areas.

A "solution" to these boom and bust cycles must be related and effective with the true problems. President Obamas's polices are equivalent to giving a drunk some "hair of the dog", i.e. more liquor. If the problem is excess money, poor credit and out of control financial instruments (derivatives), the solution is not to give more money and create more bad credit.

The Fed, particularity under Alan Greenspan and now with Mr Bernanke, is to print money to get out of problems. While this is a short term solution, up to a certain point, when applied in great excess it creates the type of problem we have today.

To be specific, the money creation policies currently being employed run the risk of creating hyperinflation, a problem far more serious than we currently have. They do not have any reasonable prospect, in my opinion, of solving the current problem other than deferring the problem somewhat and ultimately making it much worse.

These are the lessons we can learn from history, including very recent history.


On Feb 23 09:16 AM You're Kidding wrote:

> You say you see cycles in the above chart...
>
> I see nothing in it that would tell me when to get fully invested
> in this market, nor do I see anything in your article that would
> indicate you are willing to make any such predictions.
>
> That would be a smart move on your part and quite revealing as to
> how much practical, useful information you really think these "cycles"
> tell us.
>
> Nothing like having your cake and eating it, too. That's a winner
> if I've ever heard of one.
>
> But there's more! You conclude by saying:
>
> "If I am correct in the assertions made in this article, it raises
> serious doubts about the effectiveness of the Obama plan to fix the
> economic problems of the country."
>
> So let me get this straight. You are saying that these cycles you
> see, going back hundreds of years, portend the future success of
> what the government might do now? You realize, of course, that if
> the government was going to take say, a much different action, that
> your "model" would still raise the same doubts about its success,
> too? In other words, no matter what the government does, or doesn't
> do, it probably won't work, because of what your cycles tell us.
>
>
> Now, I know you haven't thought this through, because any logical
> person would see the complete irrationality of such thinking. So
> please, tell us you were wrong, so we don't have to put your name
> on the "Never Read Another Article From These People" list.
>

Does Friday's CPI Report Mark an Inflection Point?

Well done. Excellent article. The risk of hyperinflation is the biggest risk we face that the US has never faced before. The Fed seems to forget that fixing a current problem by pumping money into the economy is what has made most of our current problems. Pumping massive amounts of new money into the economy is far from being a solution; pumping massive amounts of new money runs the risk of hyperinflation, as you point out.

Recent Policy Decisions and a Greater Depression

Thank for a most provocative article. A discussion of economics can not be labeled "conservative" ( or liberal) as one of the people did commenting on your article. You make a most interesting projection of where the economy will go based on Obama's economic policies.

My question for you is whether your are a student of Elliot Wave Theory? Your projections coincide exactly with what Elliot Wave Theory (particularity as represented by people like Bob Prechter). It is fascinating to see technical projections as those presented by Bob Prechter and fundamental economic analysis as presented by you which not only match in directionality and in timing for changes of direction of the market.

Bad Bank, Bad Idea; Good Bank, Good Idea

There are really only three options:
1) sell at or below market to encourage private investors, but as the article pointed out, many banks may not want to sell at market because they have not adequately marked down the assets or selling at market will not do anything favorable for their balance sheet.
2) Buy at above market. Which private firm is going to buy assets above market? They can buy assets at market without the treasury assistance.
3) It is not inconceivable that the Treasury will guarantee losses to private investors, which then goes back that it is all simply a disguised government bailout where the taxpayer pays.

There are really no other options. There is no hidden agenda in the writer's listing of the options.


On Feb 15 11:47 AM atavist.avatar wrote:

> This is not a reasoned article. Without knowing how the Treasury
> Secretary is going to induce private equity pools to buy the assets
> which are toxic to the banks and therefore the country, his plan
> is impossible to judge. Perhaps the author has open shorts on bank
> stocks.

Paulson's Plan Fails to Understand the Problem; Madoff Is a Perfect Example

I am opposed to throwing money down a rat hole, which I believe will happen with much of the Paulson plans. I am in favor of plans to get money to our needy workers and businesses where that money can be beneficially employed. As you focus on the auto business, I suggest you might want to look a what I consider to be a good plan to realistically save the autmotive industry. You can see this article at "A Solution for General Motors"
seekingalpha.com/artic...

Thanks. Jim Wood
.



On Dec 16 03:45 AM Nothing from nothing wrote:

> Your argument is very similar to one I have been listening to lately
> with the exception of your political footnote.
>
> How is borrowing money to build roads fundamentally different than
> borrowing money to build houses was in the first place? According
> to your argument, the empty houses of the real estate bubble should
> have saved our sorry butts. Afterall, building them created jobs
> plus we got rows and rows of them sitting around. In a very real
> sense, we-the-people, are owning them since we now own the banks
> that own the houses that nobody lives in or takes care of.
>
> Tell me what good the roads are gonna do us if nobody has a car,
> gasoline or the means to obtain either??? Is that why Obama is supporting
> the Big-3-Bailout ya think? Or perhaps the campaign funding he received
> from their lobbyists or the UAW had something to do with influencing
> his perspective on that one?
>
> What about this idea... What if we all started to work on figuring
> out how to save money rather than spend it? What if we began promoting
> some goodwill and cooperation instead of greed and competition starting
> right here at home?
>
> If Wall Street wants to join Main Street in this endeavor, then step
> up. If not, then they should back up
>
>
>

Paulson's Plan Fails to Understand the Problem; Madoff Is a Perfect Example

Your view that the Fed "should know how much money exists in the economy" would probably be supported by most people. But there are two very practical aspects to this: Does the Fed really want to know and will they implement the needed controls, which we may find that many people oppose. First, does the government want to know. Alan Greenspan philosophically seemed to feel that the private sector would do a good job of looking out for their own interests and in that sense he did not have an interest in seeing in detail about many new instruments. I personally find it shocking that he apparently was not interested in tracking Credit Default Swaps which to my mind have an atom bomb potential for destruction in the economy. Public attitude is changing quickly on these issues, but historically there seems not to have been the interest. Secondly, it will require legislation or at least new administrative regulations to get information on many of these areas. Credit default swaps are really not reported in bank or non bank reporting and the slim references are below the line as contingent assets and liabilities for 10K reports. Likewise, Special Purpose Vehicles have been a way for banks to take much of the transactions off the balance sheet. Thanks for your comments. Jim Wood


On Dec 16 09:43 AM Malkiel wrote:

> It seems clear that the Treasury and Fed should know how much "money"
> exists in the economy; and since the organs of government have the
> capability of raking in W-2 forms from every worker and matching
> them up with the paperwork, or chasing down every villain who dares
> to withdraw $10k from their bank accounts by using small amounts,
> it should in principle be possible for them to maintain a database
> into which all loans or other products created by public entities
> such as banks or brokerages could be entered. Electronic reporting
> could be facilitated by standardizing loan forms for various transactions
> (they can vary by jurisdiction so long as essentials such as principal,
> interest format, and down payment are included). Hedge funds of course
> should be regulated just like brokerages and should be reporting
> their activity. The object is not to prevent players in the economy
> from doing what they do, the object is for the essential public players
> like Treasury to have the data needed to manage what they do. The
> argument that hedgies should be allowed to do their dirty business
> in secret or banks would be burdened by extra paperwork rings pretty
> hollow at this point--if actors in the economy can "create" money
> outside the banking system, then the agencies of government which
> protect the value of the currency the rest of us use are entitled
> to the particulars of that process, even if some of the information
> (just like tax info) is kept non-public...

Paulson's Plan Fails to Understand the Problem; Madoff Is a Perfect Example

It was not my intent to say that Obama had a good plan or that I am defending Obama. It was my intent to say that much of the money that Paulson is spending will be wasted. It was also my intent to say that Obama seems to offer the prospect of not following in Paulson's in tracks, which I view to be a good thing. It is my belief that Obama is much more compentent than most, but he has not really presented his plans. While you are correct to say that he was "in the room" when TARP was done, I think he is only now thinking seriously about what he plans to do. I expect we will see some pretty well thought out plans starting Jan 20th. But as I suggest in the article, I wonder if anyone has all the answers at this moment in time. Thanks for your comments. Jim Wood


On Dec 15 08:09 AM geoc wrote:

> Hello Mr Wood,
>
> I disagree with you on two points
>
> Obama was for this plan. He was in the room when it was presented.
>
> He's stated what he wants is increase Govt spending on roads (but
> we all know that will drive up taxes).
>
> Question:
> You mention needy workers building roads - how do you know the workers
> where the roads are going to be built are needy? Are we going to
> have some poverty test before deciding to build a road in an area,
> or are we going to ship poor workers to where roads are best built?
>
>
> Sounds like a glorious start... a "Great Leap Forward" if you will
> :)
>

What If the Great Depression Analogy Is Wrong?

It would be interesting for you to make a follow up article indicating what you think the correct analogy is. I personally believe will are moving towards a depression and Paulson type bailouts will not work and avoid the depression. The big concern for me is whether we will end up with hyperinflation as a result of massively printing money in a futile effort to reflate the economy by increasing the money supply. Bernanke seems to find this as his best tool after his study of the 1929 depression. While you cite many interesting cases such as those in Argentina, they are likely to be less relevant in this case. The dollar, even though weakening, is still the base currency of the world. In the remote case we have hyperinflation in the dollar, we are in very untested waters with highly adverse and unpredictable results. Congratulations on an excellent article.

Bernie Madoff Comes Out of the Closet

This is an exceptionally well written article. Congratulations.