Each year, the highly respected Global Finance magazine publishes its list of the 50 Safest Banks in the world, and the 2010 list came out today. The highest rated U.S. bank was JP Morgan at #39. Wells Fargo was only #42. Only two U.S. banks made the Top Fifty. Bank of America was a pitiful #103.
The U.S. was the center of financial innovation during the boom and became the epicenter of the financial crash. Maybe, that's the price of innovation? Unfortunately, it will take years for our nation to become the leaders we were.
There is always a silver lining, and I was pleased to see Toronto Dominion Bank, who wisely avoided "the latest hot,new financial innovations", was rated as the 14th strongest bank in the world. And, since they are the largest shareholders of TDAmeritrade, who is custodian for my clients' funds, I've especially pleased. But, I am not surprised. I made sure their funds were in strong hands!
Monday, August 30, 2010
Sunday, August 29, 2010
"China, Inc."
In anticipation of my upcoming trip to China, a good friend & client graciously loaned me her copy of "China, Inc. "How the Rise of the Next Superpower Challenges America and the World" by Ted C. Fishman.
Although published in 2006, it is still required reading for serious geo-political observers. Alternating between history and travelogue, it poignantly describes the tidal flow of people between farms and cities, and how this drives policy-making.
It describes their transition from a government driven by ideology to one driven by practicality. Instead of their formerly "Imperial" attitude of exporting communism, they accuse us of remaining "Imperial", trying to export capitalism or still driven by ideology. The difference is their own unique version of "State Capitalism", with an aggressive industrial policy, which is anathema to our Free Enterprise system.
Fishman also speculates that the last century was the American Century, but this one is likely to be the Chinese Century. Another recent read was "The Next 100 Years: A Forecast for the 21st Century" by George Friedman. He believes the last 50 years of this century will be a return to U.S. economic domination. Unfortunately, he agrees with Fishman about the next 50 years.
As scary as this indispensable book is, I thank Arlene Lindsey for loaning it to me!
Although published in 2006, it is still required reading for serious geo-political observers. Alternating between history and travelogue, it poignantly describes the tidal flow of people between farms and cities, and how this drives policy-making.
It describes their transition from a government driven by ideology to one driven by practicality. Instead of their formerly "Imperial" attitude of exporting communism, they accuse us of remaining "Imperial", trying to export capitalism or still driven by ideology. The difference is their own unique version of "State Capitalism", with an aggressive industrial policy, which is anathema to our Free Enterprise system.
Fishman also speculates that the last century was the American Century, but this one is likely to be the Chinese Century. Another recent read was "The Next 100 Years: A Forecast for the 21st Century" by George Friedman. He believes the last 50 years of this century will be a return to U.S. economic domination. Unfortunately, he agrees with Fishman about the next 50 years.
As scary as this indispensable book is, I thank Arlene Lindsey for loaning it to me!
Friday, August 27, 2010
A Good Graph is Worth a Thousand Blogs?
Several recent blogs have referred to the month of September being a traditionally lousy month for The Market. Take a look at this graph:
Clearly, September has historically been the worse month of the year, but notice how much better November and December have been. While this historical pattern is a minor part of my belief that The Market will improve in Q4, it is nonetheless some additional comfort.
Clearly, September has historically been the worse month of the year, but notice how much better November and December have been. While this historical pattern is a minor part of my belief that The Market will improve in Q4, it is nonetheless some additional comfort.
Thursday, August 26, 2010
Totally Unscientific . . .
One of the daily jobs of a financial advisor is to check on stocks that have been either up-graded or down-graded by the nerdy analysts.
Normally, there are more downgrades than upgrades when the economy is weakening, but that is definitely not the case now. I'm seeing probably 5 upgrades for every downgrade, which indicates a strengthening economy, at the same time that economic data indicates the opposite.
Maybe, it is just another reflection of the difference between The Market and The Economy. Or, maybe it is that the nerdy analysts are forward-looking, while economic data is backward-looking.
Even though the Dow just closed under 10,000 points for a seven-week-low, the sky is not falling. The Market is normally listless and meaningless in August, with less than a billion shares traded today. I'm far more concerned about September and early October. However, by late October or November, levels of uncertainty will be less, and stocks reflect that by rising, normally!
Like I said . . . totally unscientific!
Normally, there are more downgrades than upgrades when the economy is weakening, but that is definitely not the case now. I'm seeing probably 5 upgrades for every downgrade, which indicates a strengthening economy, at the same time that economic data indicates the opposite.
Maybe, it is just another reflection of the difference between The Market and The Economy. Or, maybe it is that the nerdy analysts are forward-looking, while economic data is backward-looking.
Even though the Dow just closed under 10,000 points for a seven-week-low, the sky is not falling. The Market is normally listless and meaningless in August, with less than a billion shares traded today. I'm far more concerned about September and early October. However, by late October or November, levels of uncertainty will be less, and stocks reflect that by rising, normally!
Like I said . . . totally unscientific!
Wednesday, August 25, 2010
Summer Doldrums?
August is normally one of the best months for The Market, while September is normally one of the worst. Conventional wisdom is that most traders are on vacation during August but thinking about their portfolios. When they get back to work, they start selling to re-position their portfolios, which triggers the "September Slump". But, that is mere conventional wisdom.
Yesterday, the bad economic news was that existing homes sales fell 27%, much greater than the 13% economists were expecting. Today, the bad news is that durable goods orders dropped 3.8%, ignoring the wildly volatile transportation sector, when economists were expecting a small increase (0.5%). In addition, new home sales dropped 12%, while economists were expecting an increase of 12%.
Months ago, I predicted The Market had greatly out-paced the The Economy, and that The Market would be lackluster this year, until The Economy had a chance to catch-up. Now, it looks like it will take even longer to catch-up. I've also been expecting the S&P to fluctuate between 1050 and 1150 this year. It is now slightly below that, which could mean the The Market is under-valued. Or, it could mean the The Economy is over-rated.
Ken Langone is a highly-respected investor (think Home Depot), who believes there will be no "double-dip" recession, because we never exited from the last one. The good news last Fall and this Spring were simply "sugar-highs" from the Stimulus Bill. Now that the stimulus is being exhausted, we are still stuck with the same old recession.
The continuing flow of economic news confirms that The Great Recession was deeper than anybody expected, which means it will take longer to dig our way out. Certainly, a tax increase makes no sense now. However, cutting spending/stimulus also makes no sense now. But, the combination means we will have a bigger deficit later, with even larger tax increases then.
I prefer the more boring Summer Doldrums of August and dread September!
Yesterday, the bad economic news was that existing homes sales fell 27%, much greater than the 13% economists were expecting. Today, the bad news is that durable goods orders dropped 3.8%, ignoring the wildly volatile transportation sector, when economists were expecting a small increase (0.5%). In addition, new home sales dropped 12%, while economists were expecting an increase of 12%.
Months ago, I predicted The Market had greatly out-paced the The Economy, and that The Market would be lackluster this year, until The Economy had a chance to catch-up. Now, it looks like it will take even longer to catch-up. I've also been expecting the S&P to fluctuate between 1050 and 1150 this year. It is now slightly below that, which could mean the The Market is under-valued. Or, it could mean the The Economy is over-rated.
Ken Langone is a highly-respected investor (think Home Depot), who believes there will be no "double-dip" recession, because we never exited from the last one. The good news last Fall and this Spring were simply "sugar-highs" from the Stimulus Bill. Now that the stimulus is being exhausted, we are still stuck with the same old recession.
The continuing flow of economic news confirms that The Great Recession was deeper than anybody expected, which means it will take longer to dig our way out. Certainly, a tax increase makes no sense now. However, cutting spending/stimulus also makes no sense now. But, the combination means we will have a bigger deficit later, with even larger tax increases then.
I prefer the more boring Summer Doldrums of August and dread September!
Tuesday, August 24, 2010
"Real" Stimulus
Last year, Congress approved a stimulus package of $787 billion.
Since Q2 of last year through June 30th of this year, profits of the S&P 500 have risen 52%. Productivity has soared to 3.5%, compared to 1.6% in 2007 and only 1% the next year. Still, the private sector has added only 630,000 jobs this year. We need at least 125,000 monthly, just to stay even, without even reducing overall unemployment. We desperately needed a minimum of 875,000 new jobs in the last seven month, not a mere 630,000.
Today, the amount of cash on the balance sheet of the S&P companies is almost $2 TRILLION and rising. It will soon be three times greater than the "stimulus" package by Congress.
Yet, it is not the function of business to produce jobs. They will only hire when the incremental cost of a new employee is less than the increased revenue offered by end-users from their increased demand. In other words, each new hire must produce a net gain in revenue.
Supply-side economists say more hiring would occur if we decreased income tax on high-income owners, giving them extra money. The problem is that their increased tax savings would simply be added to their existing cash levels. This is a situation where decreased employment taxes on employees & employers, i.e., social security and unemployment taxes, would decrease the incremental cost, making it cheaper to create new jobs. Cutting the right taxes is more important than simply cutting taxes.
Now, that would be a "real" stimulus!
Since Q2 of last year through June 30th of this year, profits of the S&P 500 have risen 52%. Productivity has soared to 3.5%, compared to 1.6% in 2007 and only 1% the next year. Still, the private sector has added only 630,000 jobs this year. We need at least 125,000 monthly, just to stay even, without even reducing overall unemployment. We desperately needed a minimum of 875,000 new jobs in the last seven month, not a mere 630,000.
Today, the amount of cash on the balance sheet of the S&P companies is almost $2 TRILLION and rising. It will soon be three times greater than the "stimulus" package by Congress.
Yet, it is not the function of business to produce jobs. They will only hire when the incremental cost of a new employee is less than the increased revenue offered by end-users from their increased demand. In other words, each new hire must produce a net gain in revenue.
Supply-side economists say more hiring would occur if we decreased income tax on high-income owners, giving them extra money. The problem is that their increased tax savings would simply be added to their existing cash levels. This is a situation where decreased employment taxes on employees & employers, i.e., social security and unemployment taxes, would decrease the incremental cost, making it cheaper to create new jobs. Cutting the right taxes is more important than simply cutting taxes.
Now, that would be a "real" stimulus!
Saturday, August 21, 2010
The Eye of the Hurricane?
I have long been a fan of Nouriel Roubini, a highly regarded economist more commonly known as "Dr. Doom", for having predicted The Great Recession back in 2006. He has teamed up Stephen Mihm to author the new "Crisis Economics", which I just completed.
It is not a book for the casual reader, nor the typical investor, nor the serious economist. However, it is a book for serious students of geo-economic policy.
There is a long, very readable history of what caused the last crisis. A large part of the blame was laid at the feet of Alan Greenspan for lowering interest rates too low and keeping them low for too long. Additional blame is laid at the feet of economists who believed in the "Great Moderation", believing the inherent market efficiency from minimal laissez-faire regulation and never-ending financial innovation (think derivatives), would preclude any future crisis. They argue we are entering the "Great Instability" and are now in the eye of a financial hurricane.
Yet, the authors make the point that a financial crisis is normal, similar to Minsky's argument that credit bubbles expand until they implode, that there is never a good outcome to bubbles. Keeping interest rates too low for too long creates bubbles.
The authors also talk about the problem of democracy, citing India as the example, being too slow and cumbersome to address structural reform on a timely basis. Who would have ever suspected democracy could be a problem?
Certainly, vigilance never sleeps, and financial advisors must keep on eye open for the next hurricane.
It is not a book for the casual reader, nor the typical investor, nor the serious economist. However, it is a book for serious students of geo-economic policy.
There is a long, very readable history of what caused the last crisis. A large part of the blame was laid at the feet of Alan Greenspan for lowering interest rates too low and keeping them low for too long. Additional blame is laid at the feet of economists who believed in the "Great Moderation", believing the inherent market efficiency from minimal laissez-faire regulation and never-ending financial innovation (think derivatives), would preclude any future crisis. They argue we are entering the "Great Instability" and are now in the eye of a financial hurricane.
Yet, the authors make the point that a financial crisis is normal, similar to Minsky's argument that credit bubbles expand until they implode, that there is never a good outcome to bubbles. Keeping interest rates too low for too long creates bubbles.
The authors also talk about the problem of democracy, citing India as the example, being too slow and cumbersome to address structural reform on a timely basis. Who would have ever suspected democracy could be a problem?
Certainly, vigilance never sleeps, and financial advisors must keep on eye open for the next hurricane.
The Devil in the Details
I was enthusiastic about the $787 billion stimulus bill approved by Congress last year. Obviously, infrastructure development was necessary -- with or without an anemic economy to stimulate. Infrastruture is a real investment in the future that increases demand in the short run and pays for itself in the long run.
Unfortunately, of that amount, $237 billion was for tax cuts, which did not create any new demand. Only $140 billion was spent on infrastructure! Most of the rest went to support state & local spending.
Our economy is still many times larger than the Chinese economy. Yet, they spent $586 billion on infrastructure last year & this year, to stimulate their anemic economy. Today, their economy is growing over 9% annually, compared to the U.S. which is growing less than 2% annually.
Our "stimulus" package had little to do with stimulating and only increased our borrowings from the Chinese, to pay for the tax cut.
A bold plan would have been more effective. To get us out of the Great Depression, Congress enacted the Works Progress Administration, Public Works Administration, and Civilian Conservation Corps. They build 24,000 miles of sewer lines, 480 airports, 78,000 bridges, 780 hospitals, 572,000 miles of highways and almost 15 thousand schools, courthouses, and other public buildings. That worked! Our current "stimulus" plan did not, unfortunately. It created no real, new demand for anything.
Unfortunately, of that amount, $237 billion was for tax cuts, which did not create any new demand. Only $140 billion was spent on infrastructure! Most of the rest went to support state & local spending.
Our economy is still many times larger than the Chinese economy. Yet, they spent $586 billion on infrastructure last year & this year, to stimulate their anemic economy. Today, their economy is growing over 9% annually, compared to the U.S. which is growing less than 2% annually.
Our "stimulus" package had little to do with stimulating and only increased our borrowings from the Chinese, to pay for the tax cut.
A bold plan would have been more effective. To get us out of the Great Depression, Congress enacted the Works Progress Administration, Public Works Administration, and Civilian Conservation Corps. They build 24,000 miles of sewer lines, 480 airports, 78,000 bridges, 780 hospitals, 572,000 miles of highways and almost 15 thousand schools, courthouses, and other public buildings. That worked! Our current "stimulus" plan did not, unfortunately. It created no real, new demand for anything.
Friday, August 20, 2010
One Step Forward but . . .
Yesterday, the Conference Board said its index of leading economic indicators rose modestly in July. That's a step forward! At the same time, the Philadelphia Fed said manufacturing fell in the mid-Atlantic region to the lowest level in a year. Even worse, the weekly unemployment claims rose unexpectedly to a nine month high. That's two steps backward! Naturally, the Dow fell 144 points.
It is a safe prediction that markets consistently over-react to whatever news is available!
But, note only one piece of yesterday's data released was leading. The other two were looking in the rear-view miror.
This is consistent with my expectation that the Dow will trade in a band between 1050to 1150 but slowly start trending bullish in the fourth quarter. No economic recovery has ever been a straight line!
It is a safe prediction that markets consistently over-react to whatever news is available!
But, note only one piece of yesterday's data released was leading. The other two were looking in the rear-view miror.
This is consistent with my expectation that the Dow will trade in a band between 1050to 1150 but slowly start trending bullish in the fourth quarter. No economic recovery has ever been a straight line!
Thursday, August 19, 2010
On The Bubble?
Back in 1973, when I first walked into a stock brokerage office, I saw old men watching a ticker tape cross the wall behind a black & white television. They were "stock guys", who bet on the American economy. They made fun of the "coupon clippers", whom they derided as being cowardly, but we call them "bond investors".
The same year, I became a trust officer and noticed that the portfolios of widows and children were heavily invested in bonds, because that was considered less risky than stocks. After all, bond investors are lenders to companies and must be repaid before stock investors get anything. Those investors who were extremely risk adverse were usually invested in Treasury bonds.
Since the beginning of 2008 thru the end of June this year, investors have pulled $232 billion out of stock funds and put an incredible $559 billion into bond funds! What are they thinking??
Long time readers know how I feel about long term bond funds: They scare me to death! When interest rates rise, losses are certain in long term bond funds. With rates this low currently, a rise is inevitable . . . losses are certain.
Amazingly, the most dangerous bond right now appears to be the "safest", traditionally speaking, i.e., U.S. Treasuries. Unless you plan to hold a particular Treasury bond to maturity, which doesn't happen to investors in mutual bond funds, I don't see how losses can be avoided.
When there is a collapse in Treasury prices, there will be even greater psychological damage, as wounded investors wonder if anything is safe. Treasury bonds are just another asset class. Losses can and will occur. The same is true for corporate bonds.
I've had this feeling before . . . just before the tech bubble burst . . .
The same year, I became a trust officer and noticed that the portfolios of widows and children were heavily invested in bonds, because that was considered less risky than stocks. After all, bond investors are lenders to companies and must be repaid before stock investors get anything. Those investors who were extremely risk adverse were usually invested in Treasury bonds.
Since the beginning of 2008 thru the end of June this year, investors have pulled $232 billion out of stock funds and put an incredible $559 billion into bond funds! What are they thinking??
Long time readers know how I feel about long term bond funds: They scare me to death! When interest rates rise, losses are certain in long term bond funds. With rates this low currently, a rise is inevitable . . . losses are certain.
Amazingly, the most dangerous bond right now appears to be the "safest", traditionally speaking, i.e., U.S. Treasuries. Unless you plan to hold a particular Treasury bond to maturity, which doesn't happen to investors in mutual bond funds, I don't see how losses can be avoided.
When there is a collapse in Treasury prices, there will be even greater psychological damage, as wounded investors wonder if anything is safe. Treasury bonds are just another asset class. Losses can and will occur. The same is true for corporate bonds.
I've had this feeling before . . . just before the tech bubble burst . . .
Friday, August 13, 2010
Where's the beef?
No question, deflation is a much worse problem than inflation. Once people think they can buy things cheaper if they wait, then they stop spending now.
At one time, economists believed deflation could easily be eliminated by doing the things that cause inflation, i.e., increasing the money supply and increasing deficit spending. Ben Bernanke was one of them.
We've since learned that increasing the money supply doesn't work if banks won't lend and people won't spend. We also learned deficit spending is much more difficult when the national debt was not already at astronomical levels. (It also doesn't help when politicians behave like selfish, spoiled children.)
Today's good news is that the latest inflation data doesn't show any deflation. The core CPI (consumer price index without highly volatile food and energy) was up 1.1% over last year. Of course, this is below the Fed's goal of 2%, which means it still bears watching, rather than worrying.
Long term, I continue to believe the government will over-shoot and creat inflation. When that happens, there will be much gnashing of teeth, but we should be grateful it is not deflation!
At one time, economists believed deflation could easily be eliminated by doing the things that cause inflation, i.e., increasing the money supply and increasing deficit spending. Ben Bernanke was one of them.
We've since learned that increasing the money supply doesn't work if banks won't lend and people won't spend. We also learned deficit spending is much more difficult when the national debt was not already at astronomical levels. (It also doesn't help when politicians behave like selfish, spoiled children.)
Today's good news is that the latest inflation data doesn't show any deflation. The core CPI (consumer price index without highly volatile food and energy) was up 1.1% over last year. Of course, this is below the Fed's goal of 2%, which means it still bears watching, rather than worrying.
Long term, I continue to believe the government will over-shoot and creat inflation. When that happens, there will be much gnashing of teeth, but we should be grateful it is not deflation!
Wednesday, August 11, 2010
All form but little substance . . .
Today's 265 point drop in the Dow was not a great deal of fun, but it was also not all that important. The volume was less than 1.1 billion shares, which is quite light. It is much more significant when there is heavy volume, like 1.8 billion or more, because it suggests many investors are "voting with their stocks". This is August, investors are vacationing and not voting. The Dow is only down 2.5% from the first of the year. Lots of "sound & fury" this year, huh?
Today's rally in the dollar is also not significant, nor sustainable. After yesterday's decline, some bounce-back was normal. In addition, the dollar remains the "fear currency". When the world gets nervous, investors worldwide want to hold dollars, which causes the dollar to appreciate. The report out of China this morning showed some slowing but not much. Unemployment rose in Korea but not much. Investors got nervous worldwide and bought dollars. That's why the dollar got so strong earlier this year, during the Greek debt crisis.
My advice: Have a nice vacation!
Today's rally in the dollar is also not significant, nor sustainable. After yesterday's decline, some bounce-back was normal. In addition, the dollar remains the "fear currency". When the world gets nervous, investors worldwide want to hold dollars, which causes the dollar to appreciate. The report out of China this morning showed some slowing but not much. Unemployment rose in Korea but not much. Investors got nervous worldwide and bought dollars. That's why the dollar got so strong earlier this year, during the Greek debt crisis.
My advice: Have a nice vacation!
Tuesday, August 10, 2010
. . . and, the Fed said what??
Today, the Fed left interest rates unchanged, which was no surprise and certainly no big deal.
However, they also said they would stop shrinking their balance sheet, by using the mortgage paydowns they've been receiving to buy more Treasury bonds. When that happened, the dollar dropped suddenly. The reason this happened is because the increased demand from the Fed to buy Treasuries caused the price of Treasuries to go up, which causes the yield to go down. When investors earn lower interest on the their money in the U.S., they clearly don't need as many dollars and sold them, driving down the price or value of the dollar.
Was the Fed action a good thing? While a weaker dollar will help our exports, the real message is that the Fed admitted the economy is slowing down and will do whatever it can to support continued growth.
But, how much more can the Fed actually do? It is like watching a fighter using only one arm. The "Fed-arm" is fighting as hard as it can. Unfortunately, the "Congress-arm" is broken!
However, they also said they would stop shrinking their balance sheet, by using the mortgage paydowns they've been receiving to buy more Treasury bonds. When that happened, the dollar dropped suddenly. The reason this happened is because the increased demand from the Fed to buy Treasuries caused the price of Treasuries to go up, which causes the yield to go down. When investors earn lower interest on the their money in the U.S., they clearly don't need as many dollars and sold them, driving down the price or value of the dollar.
Was the Fed action a good thing? While a weaker dollar will help our exports, the real message is that the Fed admitted the economy is slowing down and will do whatever it can to support continued growth.
But, how much more can the Fed actually do? It is like watching a fighter using only one arm. The "Fed-arm" is fighting as hard as it can. Unfortunately, the "Congress-arm" is broken!
Wednesday, August 4, 2010
The Paradox of Thrift . . . huh?
The good news is that consumers are now saving 6.4% of their after-tax income. The bad news is that consumers are saving 6.4% of their after-tax income!
Because most Americans have too much debt, it is good to see them saving more. It is good for them as individuals. However, consumer spending makes up about 67% of our GDP or national income. If they save more and spend less, our national income decreases. While increased saving is generally good for individuals, it is not good for the overall economy. Economists have long referred to this as the Paradox of Thrift.
Over the long-term, increased saving is generally good for the economy but not in the short-term.
Consumers in some nations, like China and Japan, save too much, depressing their national incomes. Their leaders are asking their people to spend more and save less. That is a luxury we do not have . . . darn it!
Because most Americans have too much debt, it is good to see them saving more. It is good for them as individuals. However, consumer spending makes up about 67% of our GDP or national income. If they save more and spend less, our national income decreases. While increased saving is generally good for individuals, it is not good for the overall economy. Economists have long referred to this as the Paradox of Thrift.
Over the long-term, increased saving is generally good for the economy but not in the short-term.
Consumers in some nations, like China and Japan, save too much, depressing their national incomes. Their leaders are asking their people to spend more and save less. That is a luxury we do not have . . . darn it!
Tuesday, August 3, 2010
Is It Party-Time Yet ??
For July, the markets were up about 7%. Yesterday, on the first trading day of the month, the markets were up another 2%. While that is always pleasant, longtime readers will recall I expect we should trade in a band between 1050 and 1150 on the S&P for most of the year, but with real bullish momentum at year-end. The S&P is now 1125, approaching the upper limit of the trading band. I don't expect this strength to hold. The consumer is still moribund. This morning, even consumer staple giant, Proctor & Gamble, reported disappointing revenue numbers. The one mistake market strategists like myself keep making is forgetting that it takes awhile to de-leverage or reduce debt, which is required for consumers to become aggressive buyers again. There will be no double-dip recession. Unfortunately, there will be no quick recovery either. It is a long, sloppy recovery. So, put the party hats and balloons back in the closet . . . darn it!
Friday, July 30, 2010
Same Conclusion for Different Reasons
Readers know I have been avoiding financial stocks all year. However, when great portfolio managers, like Bruce Berkowitz of the Fairholme Fund, argue just that financial stocks are great buys, one naturally has to wonder.
The International Monetary just issued a report that our financial system indeed remains very vulnerable to another crisis (1) because our regulatory structure is still too cumbersome, despite the new Financial Regulation bill, and (2) because the commercial real estate exposure of regional banks will be worse than expected.
My argument is that our financial system is vulnerable to another crisis because the explosive nature of derivatives has not been been contained, even by the new FinReg bill, which was a big disappointment.
If I am right, the crisis will produce a short but severe market reaction. If the IMF is right, it will be less severe but longer. But, for the sake of everybody, I hope Bruce Berkowitz is right!
The International Monetary just issued a report that our financial system indeed remains very vulnerable to another crisis (1) because our regulatory structure is still too cumbersome, despite the new Financial Regulation bill, and (2) because the commercial real estate exposure of regional banks will be worse than expected.
My argument is that our financial system is vulnerable to another crisis because the explosive nature of derivatives has not been been contained, even by the new FinReg bill, which was a big disappointment.
If I am right, the crisis will produce a short but severe market reaction. If the IMF is right, it will be less severe but longer. But, for the sake of everybody, I hope Bruce Berkowitz is right!
Tuesday, July 20, 2010
The Persistence of Deflation
Tom Brokaw is the famed longtime anchor of NBC News and serious chronicler of generations. His recent study of the Baby Boomers found the belief common to most Boomers was that "things" would always get better, an undying sense of optimism.
As a Boomer myself, I plead guilty!
That's why it is so important to closely examine the bad news. We have seen deflation for the last three months, which is not good. My favorite economic cycle predictor, i.e., ECRI, thinks a serious downturn is coming, perhaps as serious as last year. In other words, they think a "double-dip" is possible. One of my favorite economic indicators is the Baltic Dry Index, which is a rough measure of international trade. It has turned very ugly. http://www.investmenttools.com/futures/bdi_baltic_dry_index.htm
Despite my Boomer optimism, I have to say the evidence is grim. Nonetheless, unless we have a financial "heart attack" which would come through the banking system, I still see the market trading in a relatively wide range of, say, almost a thousand points until later in the year. There is a great sense of unease about the markets today for several good reasons. But, the most important reason is the volatility, which occurs within that thousand point range. Volatility almost always increases when trading volumes are low, and trading volumes are almost always low during the summer time.
Deflation is more problematic. Ben Bernanke is often called "Helicopter Ben", resulting from a speech he gave a few years ago, quiping that deflation could always be cured by taking enough money up in a helicopter and raining dollars onto the economy. The classic Monetarist definition of inflation is too many dollars chasing too few goods. Raining dollars on the economy should cure deflation. That has not happened. Take a look at http://www.bullandbearwise.com/MoneySupplyChgChart.asp
If the economy softens this year, I'm not worried, because it will pass. If the market takes a swoon, I'm not particularly worried, because it too will pass. But, if deflation persists, I'll be very concerned . . . unlike a Boomer!
As a Boomer myself, I plead guilty!
That's why it is so important to closely examine the bad news. We have seen deflation for the last three months, which is not good. My favorite economic cycle predictor, i.e., ECRI, thinks a serious downturn is coming, perhaps as serious as last year. In other words, they think a "double-dip" is possible. One of my favorite economic indicators is the Baltic Dry Index, which is a rough measure of international trade. It has turned very ugly. http://www.investmenttools.com/futures/bdi_baltic_dry_index.htm
Despite my Boomer optimism, I have to say the evidence is grim. Nonetheless, unless we have a financial "heart attack" which would come through the banking system, I still see the market trading in a relatively wide range of, say, almost a thousand points until later in the year. There is a great sense of unease about the markets today for several good reasons. But, the most important reason is the volatility, which occurs within that thousand point range. Volatility almost always increases when trading volumes are low, and trading volumes are almost always low during the summer time.
Deflation is more problematic. Ben Bernanke is often called "Helicopter Ben", resulting from a speech he gave a few years ago, quiping that deflation could always be cured by taking enough money up in a helicopter and raining dollars onto the economy. The classic Monetarist definition of inflation is too many dollars chasing too few goods. Raining dollars on the economy should cure deflation. That has not happened. Take a look at http://www.bullandbearwise.com/MoneySupplyChgChart.asp
If the economy softens this year, I'm not worried, because it will pass. If the market takes a swoon, I'm not particularly worried, because it too will pass. But, if deflation persists, I'll be very concerned . . . unlike a Boomer!
Saturday, July 17, 2010
Business Cycles, News Cycles & Other Knowns
An old Wall Street axiom is that the four most dangerous words are "This Time is Different".
Preceeding the last recession, it was widely believed this time was different because the new risk management techniques provided by derivatives, such as collateralized debt obligations, prevented any financial "blow-out". In fact, some argued that recessions were no longer possible, and that we were entering The Great Moderation instead of The Great Recession.
Prior to that recession, it was widely believed that the tech bubble of the late 1990s was also different because the increased productivity from technology would make everything more profitable, which justified the high share prices, relative to earnings per share.
I just finished reading This Time is Different by Professor Reinhart of the University of Maryland and Professor Rogoff of Harvard. In it, there is almost 800 years of data about financial crises in 66 different countries. It should not be surprising that they found very little is different before any of those crises. This is a great book but not a gentle read for the non-economist.
Frankly, it reminds me of the "Minsky Moment", named after the late Hyman Minsky, which essentially says debt will increase and increase, until it reaches that moment it can no longer increase and then collapses suddenly, causing a financial crises.
The investment implications of this today is to remember tomorrow that the four most dangerous words on Wall Street will always be the same . . . This Time is Different . . .
Preceeding the last recession, it was widely believed this time was different because the new risk management techniques provided by derivatives, such as collateralized debt obligations, prevented any financial "blow-out". In fact, some argued that recessions were no longer possible, and that we were entering The Great Moderation instead of The Great Recession.
Prior to that recession, it was widely believed that the tech bubble of the late 1990s was also different because the increased productivity from technology would make everything more profitable, which justified the high share prices, relative to earnings per share.
I just finished reading This Time is Different by Professor Reinhart of the University of Maryland and Professor Rogoff of Harvard. In it, there is almost 800 years of data about financial crises in 66 different countries. It should not be surprising that they found very little is different before any of those crises. This is a great book but not a gentle read for the non-economist.
Frankly, it reminds me of the "Minsky Moment", named after the late Hyman Minsky, which essentially says debt will increase and increase, until it reaches that moment it can no longer increase and then collapses suddenly, causing a financial crises.
The investment implications of this today is to remember tomorrow that the four most dangerous words on Wall Street will always be the same . . . This Time is Different . . .
Thursday, July 15, 2010
Financial Re-Regulation . . . FAQ
Q. Is it over?
A. The bill has passed and will become law. However, any bill this important will require many months and years of regulatory implementation. As always, the “devil will be in the details”.
Q. Is this a disaster for banking U.S. system?
A. No, but it will require some change and increase compliance costs.
Q. Will the costs be passed along to the consumer?
A. Most of it, but probably not all.
Q. Will banks begin charging for checking accounts, etc?
A. Probably, that’s the price to the consumer for reducing the risks of “too big to fail” banks.
Q. Has the problem of “too big to fail” or taxpayer bailouts really been eliminated?
A. No, but it is unlikely any future bailouts will be paid entirely by taxpayers. The regulators will also be able to move faster.
Q. Will it preclude another financial crash?
A. Nothing can guarantee that, but this will provide better tools to deal with it, when it does happen.
Q. Are there any important lessons for bankers?
A. Yes, short term incentive plans have the potential to destroy our economy.
Q. Are you glad it passed?
A. Yes, because we can finally start reducing the uncertainty. Something had to be done soon.
Q. What do you like best about the bill?
A. It creates a new function of examining systemic risk, which has never existed. It will be interesting to see what they do.
Q. What do you like least about the bill?
A. It doesn’t deal with the problem of Fannie & Freddie. Solving that problem would have delayed the rest of the bill, which needed to get done now.
Q. Don’t you think there are already enough regulations?
A. Absolutely, we are already over-regulated but, more importantly, we are very under-punished. Convictions are too rare and way too light to be worrisome to somebody on the verge of making millions.
A. The bill has passed and will become law. However, any bill this important will require many months and years of regulatory implementation. As always, the “devil will be in the details”.
Q. Is this a disaster for banking U.S. system?
A. No, but it will require some change and increase compliance costs.
Q. Will the costs be passed along to the consumer?
A. Most of it, but probably not all.
Q. Will banks begin charging for checking accounts, etc?
A. Probably, that’s the price to the consumer for reducing the risks of “too big to fail” banks.
Q. Has the problem of “too big to fail” or taxpayer bailouts really been eliminated?
A. No, but it is unlikely any future bailouts will be paid entirely by taxpayers. The regulators will also be able to move faster.
Q. Will it preclude another financial crash?
A. Nothing can guarantee that, but this will provide better tools to deal with it, when it does happen.
Q. Are there any important lessons for bankers?
A. Yes, short term incentive plans have the potential to destroy our economy.
Q. Are you glad it passed?
A. Yes, because we can finally start reducing the uncertainty. Something had to be done soon.
Q. What do you like best about the bill?
A. It creates a new function of examining systemic risk, which has never existed. It will be interesting to see what they do.
Q. What do you like least about the bill?
A. It doesn’t deal with the problem of Fannie & Freddie. Solving that problem would have delayed the rest of the bill, which needed to get done now.
Q. Don’t you think there are already enough regulations?
A. Absolutely, we are already over-regulated but, more importantly, we are very under-punished. Convictions are too rare and way too light to be worrisome to somebody on the verge of making millions.
Pat . . . pat . . . pat . . .
That’s the sound of me patting myself on the back. Tuesday, the Fed changed their position, saying the economy was weaker than they earlier expected and that it could take 5-6 years for the economy to fully recover. Long time readers know I have been expecting a Nike Swoosh type of recovery, not V-shaped, nor W-shaped, but a long, hard slog back to recovery, primarily because it takes a long time to de-leverage. Glad to see the Fed with their acres of economists finally caught up! OK, I apologize and promise not to gloat anymore. But, it did make my whole day . . .
Tuesday, July 13, 2010
Guns versus Butter...Not Really
Recently, there has been considerable debate within the economic community about the cost of the wars in Iraq and Afghanistan. Some argue the cost should only include the money appropriated by Congress, which is a little over $1 trillion. (See http://www.costofwar.com/)
Others argue you should include the continuing cost of veterans’ care over their lifetimes or the wages a fallen soldier would have earned in his lifetime or interest on the money borrowed and other derivative costs. I’ve seen estimates from $3 trillion to $6 trillion. It is interesting to arbitrarily accept the lowest estimate of $3 trillion and compare it to the funds appropriated by Congress for the 2008 TARP ($700 billion) and the 2009 Stimulus Package ($787 billion)
That makes the wars twice as costly as TARP and Stimulus combined. To be fair, there are many other costs associated with the Great Recession, adding trillions to that as well, but I’ve seen no research on that yet. What makes this interesting is these war costs came just before the cost of huge deficit spending required by Keynesian economics to re-start the economy. This will become known as the “Keynesian Endpoint”, which means it doesn’t work past this point. We were already so deep in debt from the wars that the needed deficit spending is more than we can afford.
Others argue you should include the continuing cost of veterans’ care over their lifetimes or the wages a fallen soldier would have earned in his lifetime or interest on the money borrowed and other derivative costs. I’ve seen estimates from $3 trillion to $6 trillion. It is interesting to arbitrarily accept the lowest estimate of $3 trillion and compare it to the funds appropriated by Congress for the 2008 TARP ($700 billion) and the 2009 Stimulus Package ($787 billion)
That makes the wars twice as costly as TARP and Stimulus combined. To be fair, there are many other costs associated with the Great Recession, adding trillions to that as well, but I’ve seen no research on that yet. What makes this interesting is these war costs came just before the cost of huge deficit spending required by Keynesian economics to re-start the economy. This will become known as the “Keynesian Endpoint”, which means it doesn’t work past this point. We were already so deep in debt from the wars that the needed deficit spending is more than we can afford.
Monday, July 12, 2010
Recent Inside Business Column
To read my latest column for Inside Business, click here http://www.insidebiz.com/news/second-quarter-2010-greece-love
Sunday, July 11, 2010
The End is Near......Not
Earlier this month, a market analyst named Robert Prechter predicted the Dow would fall about 90% over the next six years, from about 10,000 to only 1,000. He is better known as one of the few surviving apostles of the “Elliott Wave Theory”, first developed by Ralph Nelson Elliott in 1939 but popularized by Prechter in a 1978book titled The Elliott Wave Principle. He’s been writing a monthly newsletter (at $19/month) on this ever since.
Quoting now from the widely respected Dictionary of Finance and Investment Terms, the theory holds that all human activities, including stock market movements, can be predicted by identifying a repetitive pattern of building up and tearing down, represented graphically as eight waves, five in the direction of the main trend, followed by three corrective waves. A 5-3 moves completes a cycle, althought cycles and the underlying waves vary in duration. Some practitioners believe the most recent “supercycle” began in 1932 and ended with Black Monday in 1987, indicating a 55 supercyle.
OK, that’s a mouthful but hold on!
There are numerous other “long-wave theorists”, such as my favorite, Nicholai Kondratieff, a brilliant Russian economist who served as Deputy Minister of Food in the early 1920’s at the tender age of only 25. He also saw a “supercyle” of 48-54 years. He saw this as an advantage for capitalistic systems, since the purging and destruction that occurred during the down-cycle only insured the “surival of the fittest”. Because he believed this made capitalism better in the long run, he was stripped of his office and finally died in a Soviet prison.
And, there are other long-wave theories. But, a few observations are appropriate. First, Elliott Wave theory says “all human activities” are governed by these cycles, even love and marriage. (I struggle with that one.) Second, Prechter’s cycle is out of sync, since it has only been 33 years since the last bottom. Third, some people need to feel a sense of pre-determinism, that all things are foretold, and will find Prechter’s prediction comforting, despite over-whelming evidence of what physicists can “randomness”. Fourth, a University of Michigan study found that 54% of people were more likely to believe an extreme forecast than a moderate one, in the believe the prognosticator wouldn’t make such an outrageous prediction unless it was certain. Lastly, I’m sure Prechter will sell more newsletters (at $19/month) now!
My belief remains that we are in recovery, with predictable hiccups along the way but still in a recovery. It is not a V-shaped recovery, like the stock market made. It is not a W-shaped recovery, because things will not be as bad as last year, either in the economy or in the market. I expect a recovery in the economy to look more like the Nike Swoosh, with a rolling bottom and a long, slow climb back to full recovery. The good news is that, once the economy recovers as much as the market already has, we can expect a return of the bull, a return of positive returns. While nobody knows when that will be, I’m confident it will be.
Quoting now from the widely respected Dictionary of Finance and Investment Terms, the theory holds that all human activities, including stock market movements, can be predicted by identifying a repetitive pattern of building up and tearing down, represented graphically as eight waves, five in the direction of the main trend, followed by three corrective waves. A 5-3 moves completes a cycle, althought cycles and the underlying waves vary in duration. Some practitioners believe the most recent “supercycle” began in 1932 and ended with Black Monday in 1987, indicating a 55 supercyle.
OK, that’s a mouthful but hold on!
There are numerous other “long-wave theorists”, such as my favorite, Nicholai Kondratieff, a brilliant Russian economist who served as Deputy Minister of Food in the early 1920’s at the tender age of only 25. He also saw a “supercyle” of 48-54 years. He saw this as an advantage for capitalistic systems, since the purging and destruction that occurred during the down-cycle only insured the “surival of the fittest”. Because he believed this made capitalism better in the long run, he was stripped of his office and finally died in a Soviet prison.
And, there are other long-wave theories. But, a few observations are appropriate. First, Elliott Wave theory says “all human activities” are governed by these cycles, even love and marriage. (I struggle with that one.) Second, Prechter’s cycle is out of sync, since it has only been 33 years since the last bottom. Third, some people need to feel a sense of pre-determinism, that all things are foretold, and will find Prechter’s prediction comforting, despite over-whelming evidence of what physicists can “randomness”. Fourth, a University of Michigan study found that 54% of people were more likely to believe an extreme forecast than a moderate one, in the believe the prognosticator wouldn’t make such an outrageous prediction unless it was certain. Lastly, I’m sure Prechter will sell more newsletters (at $19/month) now!
My belief remains that we are in recovery, with predictable hiccups along the way but still in a recovery. It is not a V-shaped recovery, like the stock market made. It is not a W-shaped recovery, because things will not be as bad as last year, either in the economy or in the market. I expect a recovery in the economy to look more like the Nike Swoosh, with a rolling bottom and a long, slow climb back to full recovery. The good news is that, once the economy recovers as much as the market already has, we can expect a return of the bull, a return of positive returns. While nobody knows when that will be, I’m confident it will be.
Monday, June 7, 2010
When Economists Divorce . . .
We were watching a debate on TV between a Tea Party economist and a more traditional Republican one. They were feuding over whether or not the Austrian economics of the Tea Party was better than the Supply-side economics of the Republican Party. Renee remarked they sounded less like economists debating and more like a husband and wife bickering over a divorce.
Austrian economics is the “tough love” school of economics, emphasizing the importance of a balanced budget over all other things. Supply-side economics is the “growth” school of economics, emphasizing the importance of lowering taxes over all other things.
Unlike religion, which provides guidance for most all situations on most all days, economics is not religion. It is more like situational ethics.
When the economy is dead, Keynesian economics (read: massive deficits) is appropriate. To repair the government, Austrian economics is appropriate. To rev up a stalling economy, Supply-side economics is appropriate.
Instead of debating which view of economics is “right”, the debate should have been which school is appropriate for right now. Last year, we needed Keynesian economics and got it. This year, we need Austrian economics and hope we get it, which means both tax increases and spending cuts, especially in entitlement programs like Social Security, Medicare, and Medicaid. Once we have healed the government, the tax increases will be stalling the economy, and it will then be time to implement Supply-side economics.
So, who “won” the debate between the two economists? Like divorce, they both lost . . . because they accepted their economic beliefs as religious beliefs, forgetting they are just situational ethics.
Austrian economics is the “tough love” school of economics, emphasizing the importance of a balanced budget over all other things. Supply-side economics is the “growth” school of economics, emphasizing the importance of lowering taxes over all other things.
Unlike religion, which provides guidance for most all situations on most all days, economics is not religion. It is more like situational ethics.
When the economy is dead, Keynesian economics (read: massive deficits) is appropriate. To repair the government, Austrian economics is appropriate. To rev up a stalling economy, Supply-side economics is appropriate.
Instead of debating which view of economics is “right”, the debate should have been which school is appropriate for right now. Last year, we needed Keynesian economics and got it. This year, we need Austrian economics and hope we get it, which means both tax increases and spending cuts, especially in entitlement programs like Social Security, Medicare, and Medicaid. Once we have healed the government, the tax increases will be stalling the economy, and it will then be time to implement Supply-side economics.
So, who “won” the debate between the two economists? Like divorce, they both lost . . . because they accepted their economic beliefs as religious beliefs, forgetting they are just situational ethics.
Thursday, June 3, 2010
Deja Vu....?.
The scientific term for the stock market during May was . . . lousy. The S&P was down 8.2%, the worst month of May since 1940, when it dropped over 20%. Of course, it was reminiscent of September in 2008, following the collapse of Lehman, there are differences. The U.S. economy is now rebounding nicely. Take a look at this chart on S&P profits:
It shows the most dramatic fall in profits, followed by the most dramatic rise in profits. While some of this is certainly the result of the Stimulus bill, it nonetheless shows real strength in the U.S. economy.
In September of 2008, the world feared a collapse of the U.S. banking system. Today, the world fears a collapse of the European banking system. Make no mistake, this would certainly have a huge impact on us but would not kill us. I don’t foresee the dark days of 2008 coming back to haunt us.
Plus, I suspect investor sentiment is heavily influenced by two other events. First, many investors were terrified by the “flash crash” on May 6th ,when the Dow briefly dropped 9.2% for a few minutes before recovering most of that loss. On May 28th, there was an even worse “flash crash”. Of course, that was in 1962. Since that time, the market continued to improve nicely. Fear is paralyzing. Hint: Think Long Term!
Second, I think the emotional impact of the BP oil spill should not be quickly dismissed, as it is creating a general malaise over the country. The heavy drumbeat of bad news is taking a toll on us. Remember: Think Long Term!
It shows the most dramatic fall in profits, followed by the most dramatic rise in profits. While some of this is certainly the result of the Stimulus bill, it nonetheless shows real strength in the U.S. economy.In September of 2008, the world feared a collapse of the U.S. banking system. Today, the world fears a collapse of the European banking system. Make no mistake, this would certainly have a huge impact on us but would not kill us. I don’t foresee the dark days of 2008 coming back to haunt us.
Plus, I suspect investor sentiment is heavily influenced by two other events. First, many investors were terrified by the “flash crash” on May 6th ,when the Dow briefly dropped 9.2% for a few minutes before recovering most of that loss. On May 28th, there was an even worse “flash crash”. Of course, that was in 1962. Since that time, the market continued to improve nicely. Fear is paralyzing. Hint: Think Long Term!
Second, I think the emotional impact of the BP oil spill should not be quickly dismissed, as it is creating a general malaise over the country. The heavy drumbeat of bad news is taking a toll on us. Remember: Think Long Term!
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