Jose D. Roncal

A New Era, But Probably Not the One We Hoped for

We're now in the second week of the new Obama administration and his approval ratings are still hovering at a high 68%.

In spite of facing enormous challenges, or more likely because of them, he's hit the ground running and has set about to reverse some of the unpopular policies left from the previous administration. As promised, Obama has moved quickly to implement changes including his stimulus package, requirements for tighter Wall Street regulations and higher automobile pollution standards.

Obama and his carefully selected team are riding high and the country's hopes are riding high, but it remains to be seen how long the euphoria will last. People by nature have short memories and even though he has a lot of good will to expend in getting his agenda adopted by a Congress which now has Democratic majorities in both Houses, there are already questions regarding the viability of his proposed stimulus plan as well as opposition by advocacy groups related to other issues like stem cell research and family planning.

Some Republicans will vote no on the stimulus package because they believe it contains too much wasteful spending and doesn't do enough in the short term to create and save jobs. Others are calling for major rewrites and, as expected, Fox News has simply written it off as "socialism." But it appears that Obama has exerted a lot of effort in getting the Republicans' input in order to reach bi-partisan agreement, even attending a private dinner with ultra-right wing pundits, an act which simultaneously shocked, angered, and pleased his supporters.

The stimulus plan is likely to pass in the Democrat-dominated House, but it may run into some blocks in the Senate. It's possible that we'll know more as the week wears on and the disputes continue.

What can't be disputed is the fact that Middle-class America has rallied around him, that he is being hailed around the world as a figure that represents hope and change, and that just the fact that he was elected has already improved the country's image abroad.

It's going to be a long and painful process; an uphill battle all the way with many pressing issues that each call for immediate attention. In addition to the enormous economic mess, there are still the international problems to deal with—Iraq, Iran, Afghanistan, Israel, Hamas, Pakistan, and who knows what else is on the horizon?

Obama has proven his innate ability to mobilize people, to bring them together for a common cause, an asset in today's political environment. It's been said that the first 100 days are critical for any new president. It's seen as a window of opportunity during which he has to set the tone, establish an agenda and demonstrate that he can lead and move lawmakers in both parties to reach a consensus on his ideas, as well as convince his supporters that he can deliver on his promises.

It appears that he's well on his way to deliver, though he's made it clear that things are likely to get worse before they get better. He's making great strides to make his administration as transparent as possible, using technology to the fullest. His team has launched a website at recovery.gov where they will publicly track how funds to implement the economic stimulus package are spent after it becomes law.

In his own words, "Instead of politicians doling out money behind a veil of secrecy, decisions about where we invest will be made public, and informed by independent experts whenever possible. We will launch an unprecedented effort to root out waste, inefficiency, and unnecessary spending in our government." An oversight board will routinely update the site. That's an entirely new concept that truly speaks to change, and one we'll be keeping a close eye on.

Change does seem to be here, but there is so much that needs changing, turning things around will be like changing the course on a gigantic ocean-liner. There's still going to an extended period of forward momentum before we notice any meaningful shift in direction. It may be slow, but as long as it's steady, we can hope for the best.

This comment was posted by Jose Roncal, co-author of "The Big Gamble: Are You Investing or Speculating?" - For more information, visit financialspeculation.c...

Are Recessions Really That Bad?

All eyes are on the current recession, but we tend to overlook the many U.S. recessions we've survived since the Great Depression. They’ve varied in length and severity and each had a slightly different cause and impact on the gross domestic product (GDP). But they've have also had similarities.

First, let's look at the defined differences between a depression and a recession. The definition of a recession is a decline in a country's GDP, or negative real economic growth, for two or more successive quarters of a year. In 2007, an economist at the Federal Reserve Board suggested that a combination of GDP and gross domestic income (GDI) may be more accurate in predicting and defining a recession.

A depression refers to a sustained downturn in one or more national economies. It is more severe than a recession (which is seen as a normal downturn in the business cycle).

The Great Depression from 1929 to late 1930s was marked by a stock market crash and a banking system collapse that sparked a global downturn, including a second but relatively minor downturn in 1937. This is where we'll begin listing a few key points about past recessions.

May 1937 - mid 1938: Roosevelt Recession
GDP declined by 3.4% and more than 4 million were unemployed (19.1%).
The stock market crashed in late 1937, an event that big business blamed on Roosevelt's "New Deal." The new Social Security Insurance program caused $2 billion to be held in a Federal trust fund, which meant vast sums of money were pulled out of circulation.

February 1945 - October 1945: Union Recession
GDP declined by11% and unemployment was a moderate 1.9%.
As WWII wound down, there was a slow transition period between ending war-related manufacturing and ramping up the civilian job market. Unions were pushing for higher wages and credit was hard to come by.

November 1948 - October 1949: Post-War Recession
GDP declined by 1.1% and unemployment rose slightly to 5.9%.
Large numbers of war veterans re-entered the workforce displacing civilian workers and causing unemployment to rise. There was more concern over inflation than unemployment, so there was very little government intervention.

July 1953 - May 1954: Post-Korean War Recession
GDP declined by 2.2% and the unemployment rate was at 2.9, the lowest since WWII.
At the end of the Korean War, more dollars earmarked for national security. The Feds tightened money to curb inflation, which boosted interest rates causing a lack in consumer confidence and decreased product demand.

August 1957 - April 1958: Eisenhower Recession
GDP decline by 3.3% and unemployment was up to 6.2%.
The tighter monetary policy was supposed to curb inflation, but prices continued to rise. A world-wide recession and a strong U.S. dollar created a foreign trade deficit.

November 1973 - March 1975: Oil Crisis Recession
GDP declined by 3.6% and unemployment rose to 8.8%.
This long and deep recession was triggered by steep oil prices and the high cost of the Vietnam War creating "stagflation" and unemployment to reach 9% by May of 1975.

January 1980 - July 1980: Energy Crisis Recession
GDP declined by 1.1% and unemployment was at 7.8%.
Inflation rose to 13.5% and the Feds boosted interest rates and slowed the money supply growth. This caused a further slowing of the economy and a rise in unemployment. Since energy prices were high and supply low, consumer confidence took another hit.

July 1981 - November 1982: Iran/Energy Crisis Recession
GDP declined by 3.6% and unemployment hit 10.8%.
The recession was caused by Iran's revolution, which forced oil prices higher. The Feds tried to control inflation with tighter monetary policies. The prime rate reached 21.5% in 1982.

July 1990 - March 1991: Gulf War Recession
GDP declined by 1.5% while unemployment was at 6.8%.
Iraq invaded Kuwait causing another spike in oil prices. The North American Free Trade Agreement (NAFTA) kicked in causing some manufacturing to be moved offshore. The leveraged buyout of United Airlines set off a short-term stock market crash.

March 2001 - November 2001: 9/11 Recession
GDP declined by a mere 0.3 and the unemployment rate was at 5.5%.
This was a relatively mild recession considering the dramatic events of the period including the collapse of the dotcom bubble, the 9/11 attacks and a series of accounting scandals like Enron and other major U.S. corporations.

Current Recession
That brings us up to the current crisis caused by the collapse of the housing market, the collapse of the banking industry in the US and Europe, and a credit crunch that furthered the economic melt down.

The current recession, officially announced on December 1, 2008, fits the pattern of recent ones—but is likely to last longer than any other post-war downturn.
The unemployment rate as of January 2009 is 7.2%, a 16-year high. More than 2.6 million jobs were lost in 2008. Absent an economic booster shot, the U.S. economy is likely to lose another 2.4 to 2.8 million jobs in 2009, which would push the national unemployment rate above 9%.

This comment was posted by Jose Roncal, co-author of "The Big Gamble: Are You Investing or Speculating?" - For more information, visit financialspeculation.c...

Is Commercial Real Estate the Next to Decline?

We’re all aware of the calamitous mortgage crisis with consumers loosing their homes, bank foreclosures, the lending freeze and the rapid unraveling of the economy in general. Now the mortgage crisis is moving to Main Street and the commercial real estate market is taking a pounding.

Not too long ago, investors were jumping into the commercial real estate fast lane, buying up office towers, apartment complexes, hotels, shopping malls and any spec property that promised to reap rewards through escalating values. But now things are not looking so rosy for commercial real estate.

Contractors, investors and developers are facing what could be the worst real estate crisis since the early 1990s. The crisis in the 1990s happened when federal tax breaks led to overinvestment and overbuilding. But the impending crisis is the result of cheap credit, which tempted developers to bid up the prices of existing properties creating a price bubble.

Once again, banks are left holding the bag. In the second quarter of 2008, banks held more than 50% of commercial real estate loans, with smaller, regional lenders having a relatively larger exposure. Regional banks are now waiting for a second wave of loan losses to hit, this time instead of toxic residential debt, it’s shopping centers, hotels and major residential and commercial construction projects. The charge-off rate for these loans is about 1.1% and growing.

The number of overdue commercial construction loans is on the rise, which portends a rise in defaults. In the third quarter of 2008, overdue loans had quadrupled from two years earlier for the same period, according to Federal Reserve data. That’s the highest spike since 1994.

Jeffrey DeBoer, president of the Real Estate Roundtable estimates that about $400 billion worth of commercial real estate mortgages will come due by the end of this year. But since many banks have stopped lending to any new construction projects, developers will have a hard time refinancing the hundreds of billions in loans already on the books.

The Roundtable is part of a real estate affinity group that's leaning on the Federal Reserve and Treasury Department to create a special lending program for the commercial mortgage-backed securities market. No decisions have been made, but Treasury did indicate that extending part of their financial bail-out package to this market sector is within the realm of possibility.

Meanwhile, major construction projects across the country are on hold. From churches where the membership is uncertain about spending funds, to universities that have seen their endowments collapse, to individual developers who aren’t willing to spend money in the current economic mess. Even architectural firms are feeling the pinch as skittish clients cancel large projects.

Even though the downturn in the commercial real estate hasn’t been as dramatic or as headline grabbing as pictures of homeowners sent packing, commercial defaults could deepen and prolong the recession. Moody's Economy.com estimates that commercial real estate losses could slice about $30 billion from our economic growth this year.

Many in the construction industry are pushing Congress to approve President-elect Obama's proposed stimulus plan to revive the economy and pour hundreds of billions of dollars into rebuilding the infrastructure. It could be enough to keep developers, construction workers, architects, engineers, heavy equipment manufactures and staff members employed and supplied with spending cash until the economy recovers.

But will Obama’s plan succeed in reviving the economy and boosting consumer confidence? Will he make good on his promise to spend those funds on rebuilding the country’s infrastructure? Will he even mange to get the necessary funds in the face of growing skepticism over missing money that banks received in the first stage of the bailout package? If things go according to plan, construction firms might be able to turn their attention to public works projects like bridges, roads and schools. When you consider the huge budget shortfalls of many states and municipalities, there appears to be a sizable backlog of projects in need of funding.

This comment was posted by Jose Roncal, co-author of "The Big Gamble: Are You Investing or Speculating?" - For more information, visit financialspeculation.c...

Obama's Stimulus Package is Morphing Into a Monster

What exactly was all this U.S. Federal bailout money—the Temporary Asset Relief Program (TARP)—supposed to relieve?

Let’s review the highlights

First of all, remember back when there was a housing bubble—the one that burst? That was followed by mortgage defaults and foreclosures, which then led to major losses for financial institutions that were dealing in mortgage-backed securities. When those losses caused their balance sheets to crater, they tried to stop the bleeding by bringing lending to a screeching halt. And that resulted in a freezing up of the credit markets.

Thus the whole financial bail out plan was supposed to thaw out the frozen credit. But did it? No. Why not? Because nobody knows where the money went. Even the bailed-out banks say they can't track where they're spending the money, but even if they could, they aren’t telling us.

Then there’s the auto industry. Bush has left a $13.4 billion parting gift to G.M. and Chrysler and they have until March 31 to produce a plan for long-term profitability, including concessions from unions, creditors, suppliers and dealers. In February, another $4 billion will be available for G.M. if the rest of the $700 billion bailout package has been released. But then what?


Toyota and Honda, long considered to have the state of the art manufacturing facilities, not to mention the most appealing designs and reliable technology, are also in trouble. Toyota just announced its first operating losses in 71 years. If these two giants are faltering, one wonders how GM and Chrysler expect to bounce back. Meanwhile, where will all the bailout money go?

It’s not just the U.S. economy that needs bailing out

Ireland's finance minister just announced plans for a $7.7 billion bailout of three leading banks because of reckless property lending practices during Ireland's recent housing boom. With Ireland facing a deepening recession, Allied Irish, Bank of Ireland and Anglo-Irish all need a boost to their cash reserves just to stay alive. The banks now face government control. But will it be enough to stimulate a healthy economy for Ireland?

China’s economy, which has been affected by a sharp decline in demand for exports to the U.S. and Europe, is teetering amidst job losses and worker protests. They’ve cut interest rates for the fifth time in four months and in November they announced a $586 billion stimulus package. That may help boost the economy, but only if the country can survive long enough for their planned infrastructure projects to get moving sometime in 2010.

Why TARP failed

Excuse our naiveté, but we thought bailouts were supposed to come with defined preconditions and oversight and that the benefits would filter down to the pockets of the consumers. We were also under the impression that stimulus packages were supposed to put cold hard cash into the hands of consumers so they could start spending the economy back into motion.

We’ve all witnessed the results of having little or no bailout preconditions and the oversight that never was—failure and vaporized money. We won’t know the details of Obama’s stimulus package for a while, but whether or not consumers can be encouraged to actually spend the money is unknown. A stimulus package may also end in failure.

There is simply no confidence left in the markets, in financial advisors or economists. And just as we were mending our wounds and thinking maybe we’d seen the worst, the Madoff scandal broke, and with it, the sinking feeling that the worst may still be coming.

Even though Obama seems to represent change and optimism, it’s going to take some time for us to be able feel confident in governmental decisions again. So far, none of the bail out and promises of stimulus packages have had any effect on turning the world’s economy.

This comment was posted by Jose Roncal, co-author of "The Big Gamble: Are you investing or speculating?" - For more information, visit financialspeculation.c...