drevno

Do You Believe Borrowing Leads to Prosperity? (Part 2)

It's not only cars that represent the illusionary wealth or status (even though some people can and should genuinely afford it). It is also the house, a much bigger expense and cost. Hence it is not only driving an expensive SUV by a single person to the shopping mall, it is also living in a 3,000 sq.ft house that is essentially empty of people, and 20 or even 50 miles from a place of work, that seems such a waste of money and effort. And very likely financed by debt.

The list goes on and on - e.g. the garages so full of stuff that nobody has time to use...or a wardrobe so stocked and stacked that it is like a warehouse. All millstones around a consumer's neck.

Going into debt to pay for such excesses makes no sense indeed. And an economic recovery based on this presumption would be likely unsustainable and would likely lead back to where we are today - but without the Government's ability to bail out the failed ones again.

Why Economists Have Downgraded Obama to Bush-Plus

A tanker cannot stop on a dime, nor turn a tight corner - it's just too big, and the momentum too large. The world economy in general, and the US in particular, are just too unwieldy to respond to ANY stimulus package in a matter of days, even weeks or months.

Any changes and proposals so far are still mere band-aids, conceived for people used to be gratified instantly and cheaply, like in a fast food joint or by a video game. Applies to both the low-paid workers and the overpaid ones...The economy has no instant "reset" button, no fast solutions.

Changes promised by Obama may take even longer. And fundamental changes - e.g. in the tax system, education, infrastructure or heath care will take YEARS not weeks, to be really positively impacting the lives and wallets of Americans.

The Economy, And Why It's Taking So Long to Fix It

The only thing that is certain is that the recovery is coming. The business cycle (or the Kondriateff's long cycle, or whatever is happening now) is exactly what is says: a cycle. What goes up, will go down. And vice versa.

The question for an investor is: what to do in the meantime? Time the cycle? Buy at this seeming through - even though we are likely going to be in a see-saw pattern for a few months more - and hold for the long term? What can be considered a save "bet" now? No one has a crystal ball. And as long as more and more unexpected items are coming to light, this is no ordinary recession or a simple bubble: this is the chickens of many excesses of the past coming home to roost.
But it will come to pass, too. Give it another quarter or so. However, depressed levels of consumption (and their impact on investment) will likely remain for a longer period of time. Still, the opportunities to innovate, restructure and modernize are here, perhaps more obviously and urgently than ever before. And thus, clear opportunities for a productive use of the money on the sidelines.

Bernie Madoff Comes Out of the Closet

Madoff is only one of many thousand ignorant, overconfident or outright crooked brokers, money "managers", analysts and financial advisors that collectively duped thousands of trusting retail investors.

There's no way of making an honest quick buck without hurting someone down the line. If this market crash spells the end of retail investing for a long time, so be it. Hopefully, better regulation and legistated financial responsibility with some clawback provisions will end all the Ponzi schemes.

Remember When the Market Rallied on 3.5% GDP?

The GDP figures are a funny thing: they are not looking back as an accurate statistic of what happened in the past. They are forward looking: looking to the future when they will be corrected. Not much different from the restatements many companies do. Some of them regularly...
Poor accounting? Lack of professionalism? Political or commercial pressures? Wishful thinking? Willful manipulation? Yes. The government "Investor Relations" - the number-speak or the statements from the Fed or Treasury, is not different in its role and functioning than a company PR. Especially a company in trouble. They prefer to reassure the investor (or the nation), rather than to spook him (us).

The numbers published by a government office are not much different from the speeches or statements made by the politicians during an election campaign. Caveat emptor.

Relax, Obama's Socialist Agenda Is Capital Friendly

However sad the statistics on the situation of the health insurance in the US are, they should not be surprising. USA is not a country of equitable wealth distribution while at the same time it is a country with some of the highest costs for health service in the world. Furthermore, despite attempts in the past, the access to health care is not a right in the US, but a privilege.

This makes actually very little sense to either the economy or the country as a whole. Regardless of labeling the provision of health care 'socialist', 'managed-market', 'European socialism' or whatever, healthy population is a prerequisite for a healthy economy. Emphasis should be, for example, on preventing the losses stemming from millions of sick days that could save companies billions of dollars annually.

Easy access to adequate health care for all, with emphasis on prevention, not only for the privileged workers in higher paying jobs or UAW retirees, but for the entire population, will in the longer run be much cheaper than the current system of spotty coverage and expensive complex cures for neglected ills.

It would perhaps make sense to have a two- tier system, with a basic coverage guaranteed to all, and a gold or platinum-plated care for those who can afford it. I would not call this socialism - even in the so-called socialist and communist countries of Europe and Asia in the past, the working poor had access to the basic care - to assure human dignity on one hand and maintaining healthy and capable labor on the other - while the the elite and people with additional means always had access to gold-plated care home or abroad.

It seems to me that the right to quality of life is at least as important as the right to bear arms...

Court Declares TARP Details Must Be Released - Welcome, Era of Accountability

Finally!

But too bad we are still too far away from the transparency in ALL disclosures by (especially) big businesses.
Think about the many restatements of Nortel, Lucent, etc., the accounting scandals and frauds a la Enron, etc. in which investors were brutally and willfully mislead.

Time to get to the bottom of this mess, indeed. How otherwise can there be any investor's confidence in ANY annual statements and published financial statements? (Never mind any company's "guidance").

Dark Clouds Gather as Obama Presidency Spooks the Markets

It is silly to blame Obama or a specific government official for the lack of progress in getting out of the mess that we are in now. The blame should be addressed at all the incompetents that played key roles:

the incompetent Nobel Prize winners in economics, like Friedman and those "mathematical geniuses" of the hedge funds;
the criminally greedy Wall Street "financial wizards";
the pathetically deficient "market analysts" and "advisers"
the criminally greedy CEOs and their self-serving rubber- stamping boards;
the incompetent planners and marketing people misreading the actual level of demand;
the too eager sales people at banks and mutual funds pushing money on people that cannot pay back;
the naive borrowers that borrowed and lived beyond their actual earnings;
the currency manipulators from Soros down to amateur currency "traders";
the financial rogues in the "self-regulating" "financial giants";
the incredibly lax regulators in every industry;
the short-term policies of the US and other governments around the world aping the "leading" nations like the US or UK;
and so on and so on.

The Keynesian stimulus packages are probably just as mistaken. And so is printing of money and passing the responsibility down the road to the next generation. The whole idea of stimulating consumer consumption through more borrowing is silly and dangerous. A sustainable economy cannot be based on this or another similar pyramid scheme.

This really is the time to put money, cool thinking effort and productive resources into infrastructure, education, health care, protecting the environment, R&D and culture. Other things will take care of themselves alongside.

Black Credit Card Wars

Here's my 2-cent's worth:

1. The credit card is a great invention, but it should remain a convenience, not an easy way of getting into debt from which many just cannot seem to climb out. It is a great way of paying for goods and services without lugging cash or the cheque book. But it makes sense ONLY if the balance is paid of every month in full, or at least making substantial payments on the amount owed rather than carrying debt at usury rates.

2. I do like the idea of creating one's own black card with an appropriate picture of a dark night (romantic!) or a lump of coal (for the owners of the anthracite mines) or the picture of a certain portion of our financial system (the black hole).

After all, if one can get a good looking 'Rolex' watch for $10, why not pay with a good looking CC? After all, it is generally the cashiers in the restaurant or a hotel, whom the CC holders (of any card) are trying to impress...Or does such black CC comes out intermittently during the cocktail hour on one's own yacht or during a golf or a polo game?

Seeds of an Economic Recovery?

The current numbers may indicate what size the US economy is (as well as other economies around the world) when in the "idle" mode. There is neither a pronounced growth anywhere (i.e. boom) nor further rapid contraction (bust).

There's no growth because there's ample idle capacity to cover the essential needs. The replacement of the machinery and other productive capital items is not necessary for another few months. Ditto regarding the huge inventory of houses and commercial real estate, the full strategic reserves of oil and other materials, etc. The same goes for the households - people can and obviously are postponing certain major purchases.

But there's no bust either. Essential machines, engines, parts, cars, telecom equipment, health supplies, housing repairs, infrastructure repairs, government expenditures on services and such must be performed. Replacement and essential innovation must go on in both the industry and the households, at least at a pace indicated by the current numbers.

Although imprecise, this may be actually an example of a temporary economic equilibrium, a pause (inevitably including a small growth here or a further small contraction there). And likely, the calm before the start of the next increased activity cycle in the relatively near future..

Still Waiting for the Bottom

I believe that the pattern of short rallies and several consecutive days of pullbacks is going to persist for quite a few weeks. There's a strong tug-of-war between the optimistic or speculative investors (looking at the 'incredible values'), plus fund managers obliged to invest now, on one hand, and the day traders, the speculators and plain spooked or hard-pressed investors and funds on the other hand. In my opinion, among the reasons for a continued overall weakness in the market are these factors:

1. the Q1 of 2009 is going to be very weak in terms of earnings for a vast majority of companies in the US and around the globe.

2. dividends will likely be slashed or missed by far more companies than announced to date, due to deteriorating cash positions;

3. many more workers will lose their jobs, and those already on the dole will have run out of benefits during Q2 and Q3 of 2009 further crushing aggregate demand;
4. the stimulus plans in the US and elsewhere will take at least 3 to 6 months to have any effect;
5. the bad news coming out voluntarily or under court orders out of the distressed and failing financial institutions have not stopped by a long shot;
6. the real estate market, traditionally a significant source of cash for equity, has not found its bottom yet.
7. the uncertainty surrounding the outcome of any large state intervention and/or an outright nationalization Chavez-style, in Venezuela and possibly elsewhere.
8. the rise of protectionism and new legislative moves having impact on the volume of trade any country and supranational corporation can rely on.

Until the outcome of these (and undoubtedly many other factors) are not known or at least accounted for fully, there cannot be a sustained confidence and therefore a sustained rally in the market. I do believe, however, that answers are going to be more evident in the forthcoming few quarters of 2009. In the meantime, the day traders and a few lucky bettors - short or long - will likely carry the day.

Are We at the Beginning of a Bull Market?

Using your numbers gives me $24 billion a year of lost income per each increment of 600,000 new unemployed. That would be 2 billion per month of diminished aggregate demand, not $240 million. A large number indeed.

However, the rest of the employed people still need goods and services, generating a vastly larger aggregate demand (which also includes demand for goods and services from the industry, government, etc.) Hence, the companies producing them may have to shrink their output, but not to zero. Therefore, they will have earnings, and some will even pay dividends, and keep value of their shares at some level. That level is now being debated by the market, the great arbiter of thought and money behind it. The current situation may be reminiscent of the past situations, but the size and the composition of the world economy, the populations and their demand, the investors and speculators, the communications and many other factors influencing the market are in many respects quite different today.

Hence, the analogies with the past, while illuminating, cannot be taken at their face value.


On May 14 10:14 AM ebworthen wrote:

> There is "doom and gloom" and then there is reality.
>
> People who warned about WWII approaching and the Nazi threat were
> "doom and gloomers"; Winston Churchill went from being called one
> and heckled in Parliament to the hero of the nation in the space
> of a couple of years.
>
> Step away from the numbers; regression to the mean does not apply
> with outlier events of great magnitude.
>
> Unemployment is "usually" a lagging indicator. However, people without
> jobs don't pay mortgages, auto loans, credit card, and other bills.
> We are adding over half-a-million JOBLESS people per month. Take
> 600,000 and multiply by median income of $40,000. That's $240 million
> dollars less per month going into the economy. It is also a drag
> of $100 million at least for unemployment benefits paid out by government.
>
>
> The social impacts on the market cannot be ignored. Increased spending
> and money printing will inevitably lead to higher taxation which
> will stunt any growth. Obama's agenda will eventually tax EVERY wage
> earner, it will start immediately with cap and trade. Interest rates
> will have to be raised to prevent inflation if not hyperinflation.
>
>
> Get out of the market now; this is Spring 1930 revisited.

America Is Becoming a Banana Republic

Maybe it's time to create a parallel banking system based on brand new banks established along the standard banking principles.

They can be capitalized by the money now earmarked for bailing out failing financial institutions plus the deposits by individuals and companies fed up with the existing banks that willfully put their depositors, shareholders and the whole system at risk.

These BRAND new banks, properly managed, regulated and overseen would constitute a nucleus of rebuilding the financial system based on honesty, transparency and good economic and financial sense.

On Dubai's Default, CRE Loans and Frugal U.S. Consumers

I continue to be amazed how disconnected from economic reality or even common sense are the people who play with other people's money, e.g. banks who lend to wealthy dilettantes in the Middle East, or people who get a windfall, e.g. the oil sheiks of the Middle East.

Dubai is an artificial place in a land that should never have skyscrapers built in the tropical environment on fast-frozen foundations. In the oil-rich Middle East, fantastic but useless structures rise in one of the most inhospitable places on Earth. To build these skyscrapers and entire cities on sand and hot salty water requires gigantic inputs of energy and money. But it still serves no useful purpose, and the cost per square foot of office or retail space would deter all but the most stupid and ignorant organizations. The gilded hotels or fabulous residences could appeal only to the most extravagant or snobbish.

There is no rhyme or reason to expect Dubai and similar schemes to provide sound economic rationale for it's existence now or in the future, mainly due to its incredibly high energy cost. A lot of people will get financially hurt by this debacle instigated by irresponsible bank(er)s lending money to hairbrained schemes.

But look at it also positively: money expended on uselesss projects in Dubai went not only to the bankers for brokering this disaster or to a selected few architects and designers working at fabulous rates, but also to thousands of immigrant workers from the reagion and countless workers in factories producing millions of tons of steel and cement and carbon dioxide elwsewhere. Think of the shipping and trucking idustries that also got the cut from this make-believe project 'financed' by Dubai World.

But what is the likely lesson learned from this looming disaster? That financial prudence, banking regulation and reform, international checks and balances on megaprojects, or environmental responsibility is required by common sense? Or will be shareholders and bondholders be forever victims of unsound or manipulated data and/or bankruptcies like this, the English Channel Tunnel, or the other equally megalomaniac financial schemes of this century? I wish for the former, but am tired of holding my breath.

Time to Sell Stocks?

Clearly, no need to dump everything. But one clearly should have confidence in the health of the company and it's prospects in the market it serves, and the ever increasing competition for the dollar spent by the consumer as well as the purchasing managers.

Next Q will be really telling where we are in this economic landscape. The current "tide" (more like a choppy sea!) is not lifting all the stocks, so careful stock picking is needed if one wants to stay in the market for any length of time.