Iceland's government having early elections.
The financial meltdown appeared near to claiming Iceland's government, as the ruling Independence Party called Friday for elections in May -- two years early -- amid increasingly violent protests and the fracturing of its coalition.
I claim that the US stimulus plan, TARP, and other bailouts are not being done primarily to improve the economy or even help the country short-term or long-term. It is specifically being done to prevent revolution (as what was happening in Iceland), keeping people placated, and consolidating and preserving power of those in power now in Washington DC.
Remember that Paulson warned that the US would enter martial law if the original TARP was not passed. The power brokers in DC are running scared and are going to go to any length they feel necessary to stay in power. If they have to print money until there aren't any trees left then that's what they will do.
It also appears that the Dems in Congress are taking every opportunity to put in their pet programs that they've wanted to do for 15 years into the stimulus bills. Again - it has nothing to do with helping the economy - it is consolidation of power and pushing their own agenda.
It will be a very rough ride for the foreseeable future.
Tuesday, January 27, 2009
Monday, January 26, 2009
Friday, January 23, 2009
The trouble with CDS
Here are a couple of good blog posts on why something needs to be done pronto with CDS's:
http://market-ticker.denninger.net/archives/743-Cops-and-CDS.html
http://market-ticker.denninger.net/archives/744-More-on-CDS.html
http://market-ticker.denninger.net/archives/743-Cops-and-CDS.html
http://market-ticker.denninger.net/archives/744-More-on-CDS.html
Why aren't these ML execs in jail?
Merrill Lynch Execs Paid Themselves $15 Billion on $21.5 Billion in Losses in 2008
No wonder John Thain was sacked. On the surface it appears that he and his management were 'hiding' or at best unaware of enormous losses that were only revealed after they were purchased by the Bank of America, and the recipient of enormous amounts of government funds.
And to make matters worse, they continued to pay themselves huge salaries and bonuses for the year despite those losses.
It will be interesting to see if there is any meaningful investigation of this. We doubt it very much. The Democratic leadership have shown themselves to be a lot of noise and little meaningful action so far, and almost all the Republicans are outrageous hypocrites.
Such is the state of the deep capture of the government.The problem with Wall Street is that there is reward without commensurate risk, pervasive fraud and the misstatement of numbers without the appropriate discovery and deterrence, and a lack of responsible accountability and disclosure to the American people.
No wonder John Thain was sacked. On the surface it appears that he and his management were 'hiding' or at best unaware of enormous losses that were only revealed after they were purchased by the Bank of America, and the recipient of enormous amounts of government funds.
And to make matters worse, they continued to pay themselves huge salaries and bonuses for the year despite those losses.
It will be interesting to see if there is any meaningful investigation of this. We doubt it very much. The Democratic leadership have shown themselves to be a lot of noise and little meaningful action so far, and almost all the Republicans are outrageous hypocrites.
Such is the state of the deep capture of the government.The problem with Wall Street is that there is reward without commensurate risk, pervasive fraud and the misstatement of numbers without the appropriate discovery and deterrence, and a lack of responsible accountability and disclosure to the American people.
Wednesday, January 21, 2009
I hope Obama turns out to be a great leader
One thing that has been missing from the US Presidency for a long time is strong leadership. Bush was many things, and opinions about him span the entire spectrum, but, in my opinion, he was not an effective leader. I especially disliked the way Bush used fear as a motivator for his agenda. In my opinion, Reagan was the last president who was a true leader. He created inspiration during his first years as President at a time when the country was in bad shape.
I watched some of Obama's speeches yesterday and thought that he did a fairly good job at creating inspiration. And maybe that is what this country does need now more than "experience" - there is a big need right now for leadership with the economy collapsing, two wars going on, terrorist threats, corruption in government becoming rampant, a broken immigration system, government growth (there are now more people working in government in the US than in manufacturing and construction), an unsustainable growth in medical costs, declining oil and gas production, unemployment, the housing market collapse, etc.
I have issues with many things about Obama's past but today is a new day - for the country and for Obama. I'm hoping for the best and hoping that Obama is a fast learner. His decisions over the next year or two will have major impacts for decades to come, not only in the US but for the world. I hope he is up to the task.
Here is an excerpt from today's Tom Friedman op-ed which I tend to agree with (although I don't think a gasoline tax is a dramatic new initiative):
We can’t thrive as a country any longer by coasting on our reputation, by postponing solutions to every big problem that might involve some pain and by telling ourselves that dramatic new initiatives — like a gasoline tax, national health care or banking reform — are too hard or “off the table.” So my most fervent hope about President Obama is that he will be as radical as this moment — that he will put everything on the table.
Opportunities for bold initiatives and truly new beginnings are rare in our system — in part because of the sheer inertia and stalemate designed into our Constitution, with its deliberate separation of powers, and in part because of the way lobbying money, a 24-hour news cycle and a permanent presidential campaign all conspire to paralyze big changes.
...........
So, in sum, while it is impossible to exaggerate what a radical departure it is from our past that we have inaugurated a black man as president, it is equally impossible to exaggerate how much our future depends on a radical departure from our present. As Obama himself declared from the Capitol steps: “Our time of standing pat, of protecting narrow interests and putting off unpleasant decisions — that time has surely passed.”
We need to get back to work on our country and our planet in wholly new ways. The hour is late, the project couldn’t be harder, the stakes couldn’t be higher, the payoff couldn’t be greater.
I watched some of Obama's speeches yesterday and thought that he did a fairly good job at creating inspiration. And maybe that is what this country does need now more than "experience" - there is a big need right now for leadership with the economy collapsing, two wars going on, terrorist threats, corruption in government becoming rampant, a broken immigration system, government growth (there are now more people working in government in the US than in manufacturing and construction), an unsustainable growth in medical costs, declining oil and gas production, unemployment, the housing market collapse, etc.
I have issues with many things about Obama's past but today is a new day - for the country and for Obama. I'm hoping for the best and hoping that Obama is a fast learner. His decisions over the next year or two will have major impacts for decades to come, not only in the US but for the world. I hope he is up to the task.
Here is an excerpt from today's Tom Friedman op-ed which I tend to agree with (although I don't think a gasoline tax is a dramatic new initiative):
We can’t thrive as a country any longer by coasting on our reputation, by postponing solutions to every big problem that might involve some pain and by telling ourselves that dramatic new initiatives — like a gasoline tax, national health care or banking reform — are too hard or “off the table.” So my most fervent hope about President Obama is that he will be as radical as this moment — that he will put everything on the table.
Opportunities for bold initiatives and truly new beginnings are rare in our system — in part because of the sheer inertia and stalemate designed into our Constitution, with its deliberate separation of powers, and in part because of the way lobbying money, a 24-hour news cycle and a permanent presidential campaign all conspire to paralyze big changes.
...........
So, in sum, while it is impossible to exaggerate what a radical departure it is from our past that we have inaugurated a black man as president, it is equally impossible to exaggerate how much our future depends on a radical departure from our present. As Obama himself declared from the Capitol steps: “Our time of standing pat, of protecting narrow interests and putting off unpleasant decisions — that time has surely passed.”
We need to get back to work on our country and our planet in wholly new ways. The hour is late, the project couldn’t be harder, the stakes couldn’t be higher, the payoff couldn’t be greater.
Tuesday, January 20, 2009
Gold confiscation history from 1933
FDR's confiscation of gold in 1933 is very interesting to me. Hopefully we won't repeat this where other things are confiscated from our homes "for the good of the country" - guns, valuables, land, etc. I'm curious to see which paths and directions Obama's administration takes.
While many economists and astute journalists such as H.L. Mencken immediately pointed out the folly of such policies, the New Dealers believed that they had an ace in the hole: inflation. Yes, they reasoned, these are restrictive policies, but if the government could find a way to massively inflate the currency, then somehow people would start buying more goods as their dollars depreciated, and the ensuing spending spree would wipe out unemployment.
The monetary system of the United States at the time of the Depression could not sustain inflation very long because the country was on a gold standard. If people sensed that the government was printing too many paper dollars, by law they could redeem those dollars from the government’s store of gold. Moreover, gold coins circulated along with silver dollars, half-dollars, quarters, and dimes.
If people were exchanging their dollars for gold, then the government’s own gold supply would be diminished. Since the gold standard included requirements that the country’s money supply have at least a 40 percent gold backing, a drain on gold reserves would have forced the government to stop printing so many dollars. Therefore, the plans of the New Dealers ran headlong into the reality of the gold standard and its check on inflation.
Thus, early in his presidency, on April 5, 1933, Roosevelt signed Executive Order 6102, which ordered people to turn in their gold to the government at payment of $20.67 per ounce. While there were some exceptions for dental use, jewelry, and artists and others who used gold in their jobs, most people were not covered. (Individuals could hold up to $100 in gold coins, but the government confiscated the rest.) Furthermore, the president’s order nullified all private contracts that called for payment in gold, something that led Sen. Carter Glass of Virginia to declare that the whole thing was “dishonor.”
Roosevelt based his order on the 1917 Trading with the Enemy Act, which gave the president the power to prevent people from “hoarding gold” during a time of war. Of course, the United States was not at war in 1933, but Roosevelt claimed that it was a “national emergency” and Congress and the courts meekly bowed to the executive.
In earlier times, such an order would have been met with outrage, as freedom-loving Americans would have rebelled against such a confiscatory order from Washington. Certainly, no president before the Progressive Era would have ordered such action for fear of impeachment or being voted out of office at the next election. However, by the time Roosevelt took office in 1933, the courts already had upheld government restrictions on freedom of speech (especially during World War I) and Congress had begun the unconstitutional delegation of some of its lawmaking powers to the executive branch.
Furthermore, given the economic calamity that prevailed when Roosevelt issued EO 6102, many Americans had become convinced that economic and political freedom meant freedom to starve and were willing to give the president whatever he wanted.
Roosevelt attempted to put “teeth” in his order by means of Section 9 of the order, which said that anyone who refused to comply could be fined as much as $10,000 or be sentenced to a maximum of 10 years in prison. (Most Americans did not resist, although some simply hid their gold until the order was repealed 41 years later.) To understand the magnitude of Roosevelt’s actions against individuals, he was threatening serious fines and prison terms against anyone who held on to what historically had been the money of the American people.
Although Roosevelt made it illegal for Americans to redeem their dollars for gold, he also realized that he could not make the same threats against people from other countries. Therefore, representatives of foreign governments still could trade in their dollars for gold, although shortly after issuing his order, Roosevelt increased the price to $35 an ounce. However, given the state of international trade at the time, foreign holdings of dollars were relatively small, something that would not be the case a half century later.
The small burst of inflation generated by Roosevelt’s move did create a bit of an economic boom, as usually occurs in the early stages of inflation, although unemployment remained at about 15 percent. However, Roosevelt’s twin pillars of what historians call the First New Deal were causing havoc among some producers and entrepreneurs, who realized that the NIRA and AAA were stifling entrepreneurship and productivity. In 1935, the U.S. Supreme Court declared both the NIRA and AAA unconstitutional, but by then the New Dealers had shifted from endorsing business cartels to promoting labor cartels through the unionization of workers.
When the U.S. Supreme Court in 1937 upheld the 1935 Fair Labor Standards Act (or Wagner Act), the inflation-induced “boom” ended soon afterward and the economy tumbled into a recession within a depression, a first for the U.S. economy, as unemployment climbed to nearly 20 percent. But while Roosevelt’s seizure of privately held American gold failed to regenerate the economy, it did lay the foundation for further economic deterioration.
http://www.lewrockwell.com/anderson/anderson154.html
While many economists and astute journalists such as H.L. Mencken immediately pointed out the folly of such policies, the New Dealers believed that they had an ace in the hole: inflation. Yes, they reasoned, these are restrictive policies, but if the government could find a way to massively inflate the currency, then somehow people would start buying more goods as their dollars depreciated, and the ensuing spending spree would wipe out unemployment.
The monetary system of the United States at the time of the Depression could not sustain inflation very long because the country was on a gold standard. If people sensed that the government was printing too many paper dollars, by law they could redeem those dollars from the government’s store of gold. Moreover, gold coins circulated along with silver dollars, half-dollars, quarters, and dimes.
If people were exchanging their dollars for gold, then the government’s own gold supply would be diminished. Since the gold standard included requirements that the country’s money supply have at least a 40 percent gold backing, a drain on gold reserves would have forced the government to stop printing so many dollars. Therefore, the plans of the New Dealers ran headlong into the reality of the gold standard and its check on inflation.
Thus, early in his presidency, on April 5, 1933, Roosevelt signed Executive Order 6102, which ordered people to turn in their gold to the government at payment of $20.67 per ounce. While there were some exceptions for dental use, jewelry, and artists and others who used gold in their jobs, most people were not covered. (Individuals could hold up to $100 in gold coins, but the government confiscated the rest.) Furthermore, the president’s order nullified all private contracts that called for payment in gold, something that led Sen. Carter Glass of Virginia to declare that the whole thing was “dishonor.”
Roosevelt based his order on the 1917 Trading with the Enemy Act, which gave the president the power to prevent people from “hoarding gold” during a time of war. Of course, the United States was not at war in 1933, but Roosevelt claimed that it was a “national emergency” and Congress and the courts meekly bowed to the executive.
In earlier times, such an order would have been met with outrage, as freedom-loving Americans would have rebelled against such a confiscatory order from Washington. Certainly, no president before the Progressive Era would have ordered such action for fear of impeachment or being voted out of office at the next election. However, by the time Roosevelt took office in 1933, the courts already had upheld government restrictions on freedom of speech (especially during World War I) and Congress had begun the unconstitutional delegation of some of its lawmaking powers to the executive branch.
Furthermore, given the economic calamity that prevailed when Roosevelt issued EO 6102, many Americans had become convinced that economic and political freedom meant freedom to starve and were willing to give the president whatever he wanted.
Roosevelt attempted to put “teeth” in his order by means of Section 9 of the order, which said that anyone who refused to comply could be fined as much as $10,000 or be sentenced to a maximum of 10 years in prison. (Most Americans did not resist, although some simply hid their gold until the order was repealed 41 years later.) To understand the magnitude of Roosevelt’s actions against individuals, he was threatening serious fines and prison terms against anyone who held on to what historically had been the money of the American people.
Although Roosevelt made it illegal for Americans to redeem their dollars for gold, he also realized that he could not make the same threats against people from other countries. Therefore, representatives of foreign governments still could trade in their dollars for gold, although shortly after issuing his order, Roosevelt increased the price to $35 an ounce. However, given the state of international trade at the time, foreign holdings of dollars were relatively small, something that would not be the case a half century later.
The small burst of inflation generated by Roosevelt’s move did create a bit of an economic boom, as usually occurs in the early stages of inflation, although unemployment remained at about 15 percent. However, Roosevelt’s twin pillars of what historians call the First New Deal were causing havoc among some producers and entrepreneurs, who realized that the NIRA and AAA were stifling entrepreneurship and productivity. In 1935, the U.S. Supreme Court declared both the NIRA and AAA unconstitutional, but by then the New Dealers had shifted from endorsing business cartels to promoting labor cartels through the unionization of workers.
When the U.S. Supreme Court in 1937 upheld the 1935 Fair Labor Standards Act (or Wagner Act), the inflation-induced “boom” ended soon afterward and the economy tumbled into a recession within a depression, a first for the U.S. economy, as unemployment climbed to nearly 20 percent. But while Roosevelt’s seizure of privately held American gold failed to regenerate the economy, it did lay the foundation for further economic deterioration.
http://www.lewrockwell.com/anderson/anderson154.html
Sunday, January 18, 2009
It doesn't matter?
Maryland State Senator: It doesn’t matter if Maryland’s broke as long as Obama’s president
Truly amazing. Obama is being set up for failure by all these worshipers - he single-handedly cannot fix everything, can he? Or maybe it doesn't matter to these people as the irrationality of their logic causes them to become more and more deluded as to who Obama really is. Apparently he can do no wrong.
Here is an interesting comment from a conservative at the above link:
So…as of Tuesday, noon, we will witness a new Juneteenth as the Messiah is sworn in to protect and defend the Constitution of the United States from all enemies, foreign and domestic…and the throngs will fully expect to see and receive a lot more than 40 acres and a mule.
This worship of the incoming President is appalling. It is mockery of our history and traditions, and the serious business of governance, in its worst form. Tuesday seems more like a coronation than a Constitutionally required inauguration.
The American Idol Presidency coupled with what seems like an inordinately high expectation of the world suddenly changing to a global community of instant peace, lions laying down with lambs, and every ill being cured certainly isn’t going to enhance our “gravitas” in front of our enemies…and there are a lot of them, in the wings waiting, or confronting us presently.
So, after noon on Tuesday, then what?
Was at a military collectors show this morning, and an acquaintance of over a decade was just oozing about Obama and how everything bad was going to be set right again once that evil Bush and Cheney were out of power. He just couldn’t say enough about how wonderful Obama was. One older veteran, also a friend, asked him simply, name one thing, just one thing, that Obama has accomplished on his own in his entire life…and there was no answer, save for the perfunctory “that’s racist!” from the gentleman in question. A white liberal, totally a party-line Democrat, out here in Ohio actually believes, honestly believes, that the bank failures, the mortgage crisis, the oil crisis, and all the rest, were all staged by Bush so Bush and Cheney could make millions for themselves on the backs of the rest of the country.
Folks, 2010 is not that far away…at what point are Conservatives in this country going to get underway and get this country back on an even keel again? Elected officials such as Lisa Gladden are not the exception…they are the norm these days. Heaven help us all.
coldwarrior
Truly amazing. Obama is being set up for failure by all these worshipers - he single-handedly cannot fix everything, can he? Or maybe it doesn't matter to these people as the irrationality of their logic causes them to become more and more deluded as to who Obama really is. Apparently he can do no wrong.
Here is an interesting comment from a conservative at the above link:
So…as of Tuesday, noon, we will witness a new Juneteenth as the Messiah is sworn in to protect and defend the Constitution of the United States from all enemies, foreign and domestic…and the throngs will fully expect to see and receive a lot more than 40 acres and a mule.
This worship of the incoming President is appalling. It is mockery of our history and traditions, and the serious business of governance, in its worst form. Tuesday seems more like a coronation than a Constitutionally required inauguration.
The American Idol Presidency coupled with what seems like an inordinately high expectation of the world suddenly changing to a global community of instant peace, lions laying down with lambs, and every ill being cured certainly isn’t going to enhance our “gravitas” in front of our enemies…and there are a lot of them, in the wings waiting, or confronting us presently.
So, after noon on Tuesday, then what?
Was at a military collectors show this morning, and an acquaintance of over a decade was just oozing about Obama and how everything bad was going to be set right again once that evil Bush and Cheney were out of power. He just couldn’t say enough about how wonderful Obama was. One older veteran, also a friend, asked him simply, name one thing, just one thing, that Obama has accomplished on his own in his entire life…and there was no answer, save for the perfunctory “that’s racist!” from the gentleman in question. A white liberal, totally a party-line Democrat, out here in Ohio actually believes, honestly believes, that the bank failures, the mortgage crisis, the oil crisis, and all the rest, were all staged by Bush so Bush and Cheney could make millions for themselves on the backs of the rest of the country.
Folks, 2010 is not that far away…at what point are Conservatives in this country going to get underway and get this country back on an even keel again? Elected officials such as Lisa Gladden are not the exception…they are the norm these days. Heaven help us all.
coldwarrior
Friday, January 16, 2009
Thursday, January 15, 2009
The economy is not a machine that can be "fixed"
I like the following article:
But the whole idea of fixing, running, regulating, designing, or modeling an economy rests on the notion that, if the right smart guys are at the rheostats, the economy can be ordered by intelligent design. But the economy is no mechanism. There is no mission control. Government cannot swoop down like a deus ex machina to explain the inexplicable and fix the unfixable. Why? Because the knowledge required to grasp each of the billions of actions, transactions and interconnections would fry the neural circuitry of a thousand Ben Bernankes. This is what F. A. Hayek called the knowledge problem. Knowledge, Hayek reminded us, is not concentrated among a few central authorities but is dispersed around society. That's why bad unintended consequences follow government interventions like black swans.
A few economists have not succumbed to the "fix it" fixation. They know that society is not like a machine at all, but an ecosystem. Faster than you can say market fundamentalism, a Keynesian will scoff at this metaphor. But his favorite trope has helped to stagnate many an economy; making Rube Goldberg apparatuses out of means-ends networks, perversion out of productivity. As Czech President Vaclav Klaus wisely notes: "The market is indivisible; it cannot be an instrument at the hands of central planners."
And also this one - because most systems that we humans experience are non-linear even though we humans tend to view most systems as if they were linear:
Brad Setser writes,
Facts are facts. The US has already proved it can raise over $1.5 trillion in a single year [in Treasury borrowing]
That is a the sort of statement that could come back and haunt someone. It is along the lines of the guy jumping out of a building from the 10th floor, passing the third floor and saying, "It's all fine so far."
It is amazing what happens when you assume that you live in a linear world. You say that the multiplier for government spending is 1.57.
Really? Over what range? Think of it this way: at which level of additional government spending would the path of U.S. real GDP be the highest?
(a) $100 billion in spending above the baseline
(b) $1 trillion in spending above the baseline
(c) $100 trillion in spending above the baseline
If you use a constant multiplier of 1.57, the right answer is (c). Yet we know that this is not the right answer. At $100 trillion in additional government spending, the United States would be operating like Zimbabwe, with similar results.
So to talk about "the" multiplier, as if it were linear, has to be wrong at some level. Is the multiplier linear over the range between $100 billion of additional spending and $1 trillion of additional spending? I think that is unlikely. Between, say $400 billion and $800 billion, is the incremental multiplier still in a range between 1 and 2? I worry that it is much lower. I worry that it turns negative somewhere in that range.
(Links from Instapundit.com)
But the whole idea of fixing, running, regulating, designing, or modeling an economy rests on the notion that, if the right smart guys are at the rheostats, the economy can be ordered by intelligent design. But the economy is no mechanism. There is no mission control. Government cannot swoop down like a deus ex machina to explain the inexplicable and fix the unfixable. Why? Because the knowledge required to grasp each of the billions of actions, transactions and interconnections would fry the neural circuitry of a thousand Ben Bernankes. This is what F. A. Hayek called the knowledge problem. Knowledge, Hayek reminded us, is not concentrated among a few central authorities but is dispersed around society. That's why bad unintended consequences follow government interventions like black swans.
A few economists have not succumbed to the "fix it" fixation. They know that society is not like a machine at all, but an ecosystem. Faster than you can say market fundamentalism, a Keynesian will scoff at this metaphor. But his favorite trope has helped to stagnate many an economy; making Rube Goldberg apparatuses out of means-ends networks, perversion out of productivity. As Czech President Vaclav Klaus wisely notes: "The market is indivisible; it cannot be an instrument at the hands of central planners."
And also this one - because most systems that we humans experience are non-linear even though we humans tend to view most systems as if they were linear:
Brad Setser writes,
Facts are facts. The US has already proved it can raise over $1.5 trillion in a single year [in Treasury borrowing]
That is a the sort of statement that could come back and haunt someone. It is along the lines of the guy jumping out of a building from the 10th floor, passing the third floor and saying, "It's all fine so far."
It is amazing what happens when you assume that you live in a linear world. You say that the multiplier for government spending is 1.57.
Really? Over what range? Think of it this way: at which level of additional government spending would the path of U.S. real GDP be the highest?
(a) $100 billion in spending above the baseline
(b) $1 trillion in spending above the baseline
(c) $100 trillion in spending above the baseline
If you use a constant multiplier of 1.57, the right answer is (c). Yet we know that this is not the right answer. At $100 trillion in additional government spending, the United States would be operating like Zimbabwe, with similar results.
So to talk about "the" multiplier, as if it were linear, has to be wrong at some level. Is the multiplier linear over the range between $100 billion of additional spending and $1 trillion of additional spending? I think that is unlikely. Between, say $400 billion and $800 billion, is the incremental multiplier still in a range between 1 and 2? I worry that it is much lower. I worry that it turns negative somewhere in that range.
(Links from Instapundit.com)
Tuesday, January 13, 2009
New Treasury head "forgot" to pay taxes
What would happen if you or I "forgot" to pay our taxes? Penalties, audits, maybe threat of jail time.
But if Geithner "forgets" to pay? Not so much.
http://michellemalkin.com/2009/01/13/obamas-treasury-secretary-tax-rules-for-thee-but-not-for-me/
Amazing, and there are already apologists to cover for him. And he's going to be in charge of the IRS too? Give's you warm fuzzies doesn't it?
“He’s dedicated his career to our country and served with honor, intelligence and distinction,” incoming White House spokesman Robert Gibbs said. “That service should not be tarnished by honest mistakes, which, upon learning of them, he quickly addressed.”
Geithner failed to pay self-employment taxes for money he earned while working for the International Monetary Fund from 2001 to 2003, the transition official said. In 2006, the IRS notified him that he owed $14,847 in self-employment taxes and $2,383 in penalties from 2003 and 2004.
Transition officials discovered last fall that Geithner also had not paid the taxes in 2001 or 2002. He paid $25,970 in taxes and interest for those years several days before Obama announced his nomination, the transition official said.
Of course a bigger problem is that he "oversaw" (or more correctly, didn't) CitiGroup go into the toilet. The NY Fed was supposed to be in charge of the oversight. Not good.
http://hotair.com/archives/2009/01/14/obama-treasury-nominee-oversaw-citigroups-descent-into-the-toilet/
But if Geithner "forgets" to pay? Not so much.
http://michellemalkin.com/2009/01/13/obamas-treasury-secretary-tax-rules-for-thee-but-not-for-me/
Amazing, and there are already apologists to cover for him. And he's going to be in charge of the IRS too? Give's you warm fuzzies doesn't it?
“He’s dedicated his career to our country and served with honor, intelligence and distinction,” incoming White House spokesman Robert Gibbs said. “That service should not be tarnished by honest mistakes, which, upon learning of them, he quickly addressed.”
Geithner failed to pay self-employment taxes for money he earned while working for the International Monetary Fund from 2001 to 2003, the transition official said. In 2006, the IRS notified him that he owed $14,847 in self-employment taxes and $2,383 in penalties from 2003 and 2004.
Transition officials discovered last fall that Geithner also had not paid the taxes in 2001 or 2002. He paid $25,970 in taxes and interest for those years several days before Obama announced his nomination, the transition official said.
Of course a bigger problem is that he "oversaw" (or more correctly, didn't) CitiGroup go into the toilet. The NY Fed was supposed to be in charge of the oversight. Not good.
http://hotair.com/archives/2009/01/14/obama-treasury-nominee-oversaw-citigroups-descent-into-the-toilet/
Monday, January 12, 2009
China's miracle economy? Maybe not
I've read many articles about how China may weather the economic downturn much better than the rest of the world (I've read a few warning that they won't). I don't believe that China is in very good shape because their economy wasn't designed around self-sufficiency, instead it has been designed around selling stuff to the US and other nations. I tend to agree with Douglas McIntyre's assessment of China's economy:
The way that the Chinese GDP was going to roll forward to become the No.1 economy in the world was relatively simple. An expanding global need for cheap goods would drive a massive export machine. An expanding middle class would become rabid consumers of items made both overseas and within China.
The system was fool-proof. Even remarkably intelligent economists and journalists talked and wrote about "the Chinese Miracle." In 2007, the nation's GDP was $3.2 trillion, but was growing at 11%. US GDP was well over $14 trillion that year, but its growth rate was 3%. It was only a matter of time before the lines crossed.
China has been able to draw upon a huge reserve of rural labor. People have moved from rural China to a number of large industrial cities in the interior of the country, many of which now have populations in the millions. Factory complexes were built in these same areas. As long as demand for output moved up, the labor forces in these regions grew. China created its own middle class which made and consumed goods at record rates.
The central government has believed that as the demand for exports softened recently due to the global recession, the country's new middle class would continue to help GDP growth through consumption.
The plan has fallen apart like a cheap watch. According to The Wall Street Journal, "China's exports in December fell 2.8% from a year earlier to $111.16 billion, while imports in the month fell 21.3% to $72.18 billion."
What was unimaginable a year ago has now happened. China has entered a recession and it may end up being deeper than the one in the US. It is not clear that the government can mount and manage a plan to create about 10 million new jobs. This will be an even more difficult task if exports continue to fall sharply. China does not have a service industry which is anywhere close to being as large a part of the GDP as it is in the US.
The illusion developed over the last decade was that China had become an independent power with a population which could make and consume goods at levels which have never been seen before. During the last two quarters, it has become clear that the the opposite is true. China's economy may be the most dependent large economy on earth.
If GDP in the US, EU, and Japan contract at 5% this year, China's economy is very likely to shrink faster. It will be faced with a sharp drop in what it makes and exports. More importantly, large numbers of Chinese are leaving the huge new industrial cities and going back to rural regions where they can at least find work growing their own food. What is more than a trickle now could become a flood. Those who have gone back to non-industrialized sections of the country will not be net consumers at all.
With a short-lived and dwindling middle class, China no longer has the economic core to continue the "miracle." China has just become another big country in trouble.
http://blogs.moneycentral.msn.com/topstocks/archive/2009/01/12/the-big-china-recession.aspx
The way that the Chinese GDP was going to roll forward to become the No.1 economy in the world was relatively simple. An expanding global need for cheap goods would drive a massive export machine. An expanding middle class would become rabid consumers of items made both overseas and within China.
The system was fool-proof. Even remarkably intelligent economists and journalists talked and wrote about "the Chinese Miracle." In 2007, the nation's GDP was $3.2 trillion, but was growing at 11%. US GDP was well over $14 trillion that year, but its growth rate was 3%. It was only a matter of time before the lines crossed.
China has been able to draw upon a huge reserve of rural labor. People have moved from rural China to a number of large industrial cities in the interior of the country, many of which now have populations in the millions. Factory complexes were built in these same areas. As long as demand for output moved up, the labor forces in these regions grew. China created its own middle class which made and consumed goods at record rates.
The central government has believed that as the demand for exports softened recently due to the global recession, the country's new middle class would continue to help GDP growth through consumption.
The plan has fallen apart like a cheap watch. According to The Wall Street Journal, "China's exports in December fell 2.8% from a year earlier to $111.16 billion, while imports in the month fell 21.3% to $72.18 billion."
What was unimaginable a year ago has now happened. China has entered a recession and it may end up being deeper than the one in the US. It is not clear that the government can mount and manage a plan to create about 10 million new jobs. This will be an even more difficult task if exports continue to fall sharply. China does not have a service industry which is anywhere close to being as large a part of the GDP as it is in the US.
The illusion developed over the last decade was that China had become an independent power with a population which could make and consume goods at levels which have never been seen before. During the last two quarters, it has become clear that the the opposite is true. China's economy may be the most dependent large economy on earth.
If GDP in the US, EU, and Japan contract at 5% this year, China's economy is very likely to shrink faster. It will be faced with a sharp drop in what it makes and exports. More importantly, large numbers of Chinese are leaving the huge new industrial cities and going back to rural regions where they can at least find work growing their own food. What is more than a trickle now could become a flood. Those who have gone back to non-industrialized sections of the country will not be net consumers at all.
With a short-lived and dwindling middle class, China no longer has the economic core to continue the "miracle." China has just become another big country in trouble.
http://blogs.moneycentral.msn.com/topstocks/archive/2009/01/12/the-big-china-recession.aspx
Sunday, January 11, 2009
Sears closing more stores
In my opinion Sears has been one of the worst run companies in the past 20 years. Now they are closing 8 more stores - they announced closing 14 stores in their previous quarter.
http://www.dealerscope.com/article/after-announcing-huge-loss-sears-said-close-stores-quarter-400870_1.html
I think they should just shut down the company altogether. If you can't turn things around in 20 years maybe it's time to give up.
Sears is over-priced, has mediocre merchandise, and has had very poor customer service for a long time. A friend of mine worked there in the 80's when the geniuses at Sears decided to get rid of all their knowledgeable, long-employed salespeople and replace them with minimum-wage folks who knew nothing about what they were selling. Yet their high prices remained. That's when the company started going down big-time.
Wal-Mart, Costco, and other discounters have been eating Sears for lunch ever since.
Their merger with K-Mart was weird - the two losers merging together will make a winner hopefulness. Big surprise, it hasn't worked.
Maybe this major recession will put them under for good. I don't see how they can survive.
http://www.dealerscope.com/article/after-announcing-huge-loss-sears-said-close-stores-quarter-400870_1.html
I think they should just shut down the company altogether. If you can't turn things around in 20 years maybe it's time to give up.
Sears is over-priced, has mediocre merchandise, and has had very poor customer service for a long time. A friend of mine worked there in the 80's when the geniuses at Sears decided to get rid of all their knowledgeable, long-employed salespeople and replace them with minimum-wage folks who knew nothing about what they were selling. Yet their high prices remained. That's when the company started going down big-time.
Wal-Mart, Costco, and other discounters have been eating Sears for lunch ever since.
Their merger with K-Mart was weird - the two losers merging together will make a winner hopefulness. Big surprise, it hasn't worked.
Maybe this major recession will put them under for good. I don't see how they can survive.
Friday, January 9, 2009
Paycheck to paycheck
I read in the latest issue of Document magazine today that about 50% of workers live paycheck to paycheck, and about 25% of people who earn over $100K live paycheck to paycheck. Wow.
Also, the average household has about $8000 to $9000 in credit card debt. That's average.
So that means that over one quarter of people who have mortgages with any kind of balloon payments coming due, or variable mortgages where the payments are going to increase, are going to go into foreclosure. They have no money. And it's a pretty simple guess who has the credit card debt - those who live paycheck to paycheck, or those who don't?
Net usable income is going to be decreasing for most everyone too. Many (millions) are going to lose their jobs. But those who have jobs are going to see income erosion too - small or no bonuses, stock options that are worthless, retirees who have IRA's are going to have smaller withdrawls, some companies are moving toward fewer hours worked in a week, salary and wage freezes and reductions, temporary factory and business closings, increased fees and taxes at the state and local levels, and on and on.
On the other side is a reduction is wealth - house values plummeting (I doubt that many areas are increasing in value these days), IRA's and 401K's losing 10's of percentages, regular stock and bond investments decreasing, future stock options now worthless and can't be counted upon, other assets losing value now that people are saving, there is an over-capacity of many goods, and lots more people are broke.
People in debt and living paycheck to paycheck who have decided to begin to saving are deluded. It's way too late. They won't be able to dig out of their holes anytime soon (it takes many years). They are done. I expect the bankruptcy rate to skyrocket in 2009 and 2010.
Also, the average household has about $8000 to $9000 in credit card debt. That's average.
So that means that over one quarter of people who have mortgages with any kind of balloon payments coming due, or variable mortgages where the payments are going to increase, are going to go into foreclosure. They have no money. And it's a pretty simple guess who has the credit card debt - those who live paycheck to paycheck, or those who don't?
Net usable income is going to be decreasing for most everyone too. Many (millions) are going to lose their jobs. But those who have jobs are going to see income erosion too - small or no bonuses, stock options that are worthless, retirees who have IRA's are going to have smaller withdrawls, some companies are moving toward fewer hours worked in a week, salary and wage freezes and reductions, temporary factory and business closings, increased fees and taxes at the state and local levels, and on and on.
On the other side is a reduction is wealth - house values plummeting (I doubt that many areas are increasing in value these days), IRA's and 401K's losing 10's of percentages, regular stock and bond investments decreasing, future stock options now worthless and can't be counted upon, other assets losing value now that people are saving, there is an over-capacity of many goods, and lots more people are broke.
People in debt and living paycheck to paycheck who have decided to begin to saving are deluded. It's way too late. They won't be able to dig out of their holes anytime soon (it takes many years). They are done. I expect the bankruptcy rate to skyrocket in 2009 and 2010.
Thursday, January 8, 2009
Stretched rubber bands break
Let's look at Iceland for a minute:
As a result of the global deflationary debt unwind, Iceland's three biggest banks, Kaupthing Bank, Landsbanki Island and Glitnir Bank have collapsed under the weight of about $61 billion in debts, and its stock market fell has fallen 81% so far this year. Meanwhile, employment has also plummeted as the collapse of the financial sector and large layoffs since October have resulted in a complete standstill in the construction industry. Most importantly, the deflationary collapse has caused the Krona, Iceland's currency, to crash which leading to hoarding of goods at supermarkets and an inflation of 16%.
The Iceland example shows how a nation can experience deflation (crashing stock, bond, and real estate markets) while also experiencing high inflation due to a currency collapse (soon to be hyperinflation when it allows its currency to float again).
At one point not long ago (as recent as 2007) Iceland had one of the highest GDP's per capita and was above the US (and at one point in the recent past was at #6). But it turned out it was all a sham. What do the Icelanders produce anyway? Turns out they were producing BS. Now they are screwed, big time.
Their economic engine threw a rod. It is broken. If they think that all they need is a major tune-up (by way of stimulus packages and bailouts) then they are deluding themselves. The engine has been destroyed. And they are unlikely to be able to rebuild it using the same design. They need a new design for their economic engine in the future.
Will the US follow in Iceland's footsteps? Unknown at this time but that's for a future post.There are some observations that should be discussed though.
The US economic engine based on consumerism (fueled by debt) is another engine that has thrown a rod too. It is broken. It is a bad design. Trying to tune up the engine isn't going to make much difference. We need a new design. The US needs to start producing something again, instead of outsourcing production, providing "services," and "creating" wealth with debt vehicles (credit cards, loans, printing money, etc.).
The US needs to learn how to take care of things again, produce and purchase high-quality, built-to-last items that can be repaired for a fraction of a new one - and people need to learn how to take care of and repair their own stuff. We need to stop being a throw-away society. (I'll address these in a future post too.)
Government spending and entitlement programs are out of control and will destroy the country by themselves if changes aren't made. Medicaid/Medicare costs are increasing at 6% per year and is unsustainable. Many other programs are in the same boat. Other countries are in the same pickle too. At some point people and the governments will have to face up to the fact that everyone is NOT entitled to a job, a college education, top-quality healthcare, a house, more food than they can eat, a TV, a Wii, a car, etc.
Deflation is going to happen. Bailout is a good term for what is happening to "prevent deflation." We see the banks and automakers and others getting "bailouts" but it's like a large boat with a square foot hole in the bottom and people using a small cup to bail out the water. It's a losing battle. The hole is too big!
This collapse occurred after a few decades of rubber band stretching. I believe the destruction of wealth, and deflation, is going to be much worse than most "experts" expect. The creative financing was producing leverage levels of over 100 to 1. There is huge over-capacity of most everything - houses, cars, clothing, strip malls, real estate agents, banks, restaurants, PC's, even milk. Asset inflation of most everything was enormous - just look at housing. The stock market was horribly inflated.
Deflation is going to be huge - and the $1 trillion "stimulus" isn't going to stimulate much of anything. I foresee well over $50 trillion of wealth destroyed over the next several years - these $1 trillion stimulus and bailout packages are going to be just a few drops in the bucket.
So what is the purpose of these stimulus programs and bailouts? My thought is that it has little to do with the economy as such, these are being done to prevent a revolution. If too many people lose their jobs, get thrown out of their houses, go broke, etc., the government could collapse altogether - riots in the streets, cities burning, crime rampant, local governments overthrown - enough people could reach a point where they felt they had nothing left to lose. This is what I believe is scaring the politicians.
Remember that Treasury Secretary Paulson warned Congress that there would be a need for martial law if the first $700 bailout bill didn't pass - maybe he was right. So the question for our "leaders" in the Government becomes, "what is needed to keep the masses at bay?"
The government bails out the Big 3 so that they can continue to produce cars that nobody wants to buy. The government buys milk powder that nobody wants to buy and puts it in giant warehouses. The government gives the banks money so that they can continue to keep people employed to do "financial engineering" and other useless activities.
This becomes a slippery slope. How far can the government get away with paying people to do worthless activities (inside and outside the government) and keep the dollar (and the country) from completely collapsing? Will the government pay people to watch TV too? (Answer: yes - that is essentially what welfare and extended unemployment insurance does.) It seems that the collapse of the dollar is a matter of when, not if, and we will see if the country can survive.
Why isn't Reykjavik burning? It's getting hotter there . . .
The anger expressed by ordinary citizens has been limited, so far. More and more people gather each Saturday in front of the parliament in Reykjavik.
Some of the 6,000 protesters at a demonstration on Saturday threw rolls of toilet paper at the building where a few months earlier the premier had declared that the Icelandic banks were robust and the country's finances were healthy.
As a result of the global deflationary debt unwind, Iceland's three biggest banks, Kaupthing Bank, Landsbanki Island and Glitnir Bank have collapsed under the weight of about $61 billion in debts, and its stock market fell has fallen 81% so far this year. Meanwhile, employment has also plummeted as the collapse of the financial sector and large layoffs since October have resulted in a complete standstill in the construction industry. Most importantly, the deflationary collapse has caused the Krona, Iceland's currency, to crash which leading to hoarding of goods at supermarkets and an inflation of 16%.
The Iceland example shows how a nation can experience deflation (crashing stock, bond, and real estate markets) while also experiencing high inflation due to a currency collapse (soon to be hyperinflation when it allows its currency to float again).
At one point not long ago (as recent as 2007) Iceland had one of the highest GDP's per capita and was above the US (and at one point in the recent past was at #6). But it turned out it was all a sham. What do the Icelanders produce anyway? Turns out they were producing BS. Now they are screwed, big time.
Their economic engine threw a rod. It is broken. If they think that all they need is a major tune-up (by way of stimulus packages and bailouts) then they are deluding themselves. The engine has been destroyed. And they are unlikely to be able to rebuild it using the same design. They need a new design for their economic engine in the future.
Will the US follow in Iceland's footsteps? Unknown at this time but that's for a future post.There are some observations that should be discussed though.
The US economic engine based on consumerism (fueled by debt) is another engine that has thrown a rod too. It is broken. It is a bad design. Trying to tune up the engine isn't going to make much difference. We need a new design. The US needs to start producing something again, instead of outsourcing production, providing "services," and "creating" wealth with debt vehicles (credit cards, loans, printing money, etc.).
The US needs to learn how to take care of things again, produce and purchase high-quality, built-to-last items that can be repaired for a fraction of a new one - and people need to learn how to take care of and repair their own stuff. We need to stop being a throw-away society. (I'll address these in a future post too.)
Government spending and entitlement programs are out of control and will destroy the country by themselves if changes aren't made. Medicaid/Medicare costs are increasing at 6% per year and is unsustainable. Many other programs are in the same boat. Other countries are in the same pickle too. At some point people and the governments will have to face up to the fact that everyone is NOT entitled to a job, a college education, top-quality healthcare, a house, more food than they can eat, a TV, a Wii, a car, etc.
Deflation is going to happen. Bailout is a good term for what is happening to "prevent deflation." We see the banks and automakers and others getting "bailouts" but it's like a large boat with a square foot hole in the bottom and people using a small cup to bail out the water. It's a losing battle. The hole is too big!
This collapse occurred after a few decades of rubber band stretching. I believe the destruction of wealth, and deflation, is going to be much worse than most "experts" expect. The creative financing was producing leverage levels of over 100 to 1. There is huge over-capacity of most everything - houses, cars, clothing, strip malls, real estate agents, banks, restaurants, PC's, even milk. Asset inflation of most everything was enormous - just look at housing. The stock market was horribly inflated.
Deflation is going to be huge - and the $1 trillion "stimulus" isn't going to stimulate much of anything. I foresee well over $50 trillion of wealth destroyed over the next several years - these $1 trillion stimulus and bailout packages are going to be just a few drops in the bucket.
So what is the purpose of these stimulus programs and bailouts? My thought is that it has little to do with the economy as such, these are being done to prevent a revolution. If too many people lose their jobs, get thrown out of their houses, go broke, etc., the government could collapse altogether - riots in the streets, cities burning, crime rampant, local governments overthrown - enough people could reach a point where they felt they had nothing left to lose. This is what I believe is scaring the politicians.
Remember that Treasury Secretary Paulson warned Congress that there would be a need for martial law if the first $700 bailout bill didn't pass - maybe he was right. So the question for our "leaders" in the Government becomes, "what is needed to keep the masses at bay?"
The government bails out the Big 3 so that they can continue to produce cars that nobody wants to buy. The government buys milk powder that nobody wants to buy and puts it in giant warehouses. The government gives the banks money so that they can continue to keep people employed to do "financial engineering" and other useless activities.
This becomes a slippery slope. How far can the government get away with paying people to do worthless activities (inside and outside the government) and keep the dollar (and the country) from completely collapsing? Will the government pay people to watch TV too? (Answer: yes - that is essentially what welfare and extended unemployment insurance does.) It seems that the collapse of the dollar is a matter of when, not if, and we will see if the country can survive.
Why isn't Reykjavik burning? It's getting hotter there . . .
The anger expressed by ordinary citizens has been limited, so far. More and more people gather each Saturday in front of the parliament in Reykjavik.
Some of the 6,000 protesters at a demonstration on Saturday threw rolls of toilet paper at the building where a few months earlier the premier had declared that the Icelandic banks were robust and the country's finances were healthy.
Restaurants are getting hammered too
What's interesting to me is that contraction started over a year ago. I've noticed a dramatic drop-off in restaurant activity during lunchtime in my city just over the past 3 or 4 months. Restaurants that six months ago would have waiting lines by 11:30 am now never fill up during lunch rush. There is contraction going on everywhere. When will we hear pleas for bailouts for restaurants too?
Tuesday, January 6, 2009
Who can buy a $500K house?
I keep reading how the housing market will bottom out this year - I just don't see it. The days of crazy ARMS, ALT-A, balloon payment sub-prime nonsense is over (for now) so let's look at some simple mathematics.
The conventional wisdom is that nobody should buy a house for more than 3X or 4X their income - personally I think 4X is pushing it but let's use that to do some calculations.
From Wikipedia the breakdown is as follows: 28% of households make $0 to $25K, 27% make between $25K and $50K, 18% make between $50K and $75K, 11% make between $75K and $100K, and 13% make between $100K and $200K and the rest (~3%) make over $200K. There are about 111 million households in the US.
So if we take the 4X rule then a house costing more than $200K (people making over $50K) would only be affordable for 45% of households. Now for a house costing more than $400K there would only be about 16% that could afford the house. That's a pretty small market - about 18 million households (especially when many of these people do not want to or cannot buy a house for various reasons).
If we take the more conservative 3X income rule then the market for a house costing over $400K is only about 7% or 8% of all households - about 9 million households. That's tiny when you really think about it.
When I read about California housing and how the houses are $600K, $700K, $800K , $1.2 million, I just don't understand who is really buying these houses. The whole thing has been a scam. And when you include property taxes, utilities, etc., there is no way most of these people could afford these high priced houses. Just no way.
And if the banks weren't doing crazy stuff then they would have required a 10% down payment too - very few people would be able to come up with the tens of thousands of cash in the first place. Nothing but insanity. Just amazing.
I have also read anecdotes that these $800K type mcmansions really only cost about $200K or so to build, including the property too. That means the increase in "value" was complete nonsense and a scam. If people just sat down with a calculator they could easily see that this inflation of housing prices was unsustainable.
These horribly inflated prices are going to force the prices down hundreds of thousands of dollars in order to find enough of a market for them to sell - especially if what I read about the $200K to build them is accurate. The housing market is going to continue to crater until they become affordable again for a larger market (no more creative financing either - just conventional mortgages).
And to add to the deflation problem is that developers were building thousands upon thousands of new houses for years - the market is completely over-saturated. There is a huge inventory of houses now which will force the prices down too. Foreclosures are also causing prices to drop rapidly. And, or course, the US and the world is in the worst recession since the Great Depression causing further erosion of housing prices.
The housing bubble isn't so much a deflation as it is a correction to sane, reasonable housing prices that should have been there all along. But there will be deflation because developers built too many houses thinking that the price inflation scam would never end - the inventory is huge.
Banks are number one to blame for selling houses to people who couldn't afford them and using the BS creative financing to boot. But everyone was in on the scam - the banks, mortgage companies, appraisers, builders, developers, insurance companies, buyers, investors, real estate companies and agents, city planners, retailers like Home Depot, regulators, auditors, the SEC, states, Congress, the media - everyone. And now the taxpayers get to pay for it all in the end.
The housing market is going to be very ugly for a long time, especially in the really insane areas like Southern California, Phoenix, Las Vegas, and Florida. It's going to be a rough ride.
It wouldn't surprise me at all if city and state governments started to burn down empty houses to lessen supply in an attempt to keep house prices up - after all, property taxes are going to drop significantly with the house price deflation.
http://en.wikipedia.org/wiki/Household_income_in_the_United_States
The conventional wisdom is that nobody should buy a house for more than 3X or 4X their income - personally I think 4X is pushing it but let's use that to do some calculations.
From Wikipedia the breakdown is as follows: 28% of households make $0 to $25K, 27% make between $25K and $50K, 18% make between $50K and $75K, 11% make between $75K and $100K, and 13% make between $100K and $200K and the rest (~3%) make over $200K. There are about 111 million households in the US.
So if we take the 4X rule then a house costing more than $200K (people making over $50K) would only be affordable for 45% of households. Now for a house costing more than $400K there would only be about 16% that could afford the house. That's a pretty small market - about 18 million households (especially when many of these people do not want to or cannot buy a house for various reasons).
If we take the more conservative 3X income rule then the market for a house costing over $400K is only about 7% or 8% of all households - about 9 million households. That's tiny when you really think about it.
When I read about California housing and how the houses are $600K, $700K, $800K , $1.2 million, I just don't understand who is really buying these houses. The whole thing has been a scam. And when you include property taxes, utilities, etc., there is no way most of these people could afford these high priced houses. Just no way.
And if the banks weren't doing crazy stuff then they would have required a 10% down payment too - very few people would be able to come up with the tens of thousands of cash in the first place. Nothing but insanity. Just amazing.
I have also read anecdotes that these $800K type mcmansions really only cost about $200K or so to build, including the property too. That means the increase in "value" was complete nonsense and a scam. If people just sat down with a calculator they could easily see that this inflation of housing prices was unsustainable.
These horribly inflated prices are going to force the prices down hundreds of thousands of dollars in order to find enough of a market for them to sell - especially if what I read about the $200K to build them is accurate. The housing market is going to continue to crater until they become affordable again for a larger market (no more creative financing either - just conventional mortgages).
And to add to the deflation problem is that developers were building thousands upon thousands of new houses for years - the market is completely over-saturated. There is a huge inventory of houses now which will force the prices down too. Foreclosures are also causing prices to drop rapidly. And, or course, the US and the world is in the worst recession since the Great Depression causing further erosion of housing prices.
The housing bubble isn't so much a deflation as it is a correction to sane, reasonable housing prices that should have been there all along. But there will be deflation because developers built too many houses thinking that the price inflation scam would never end - the inventory is huge.
Banks are number one to blame for selling houses to people who couldn't afford them and using the BS creative financing to boot. But everyone was in on the scam - the banks, mortgage companies, appraisers, builders, developers, insurance companies, buyers, investors, real estate companies and agents, city planners, retailers like Home Depot, regulators, auditors, the SEC, states, Congress, the media - everyone. And now the taxpayers get to pay for it all in the end.
The housing market is going to be very ugly for a long time, especially in the really insane areas like Southern California, Phoenix, Las Vegas, and Florida. It's going to be a rough ride.
It wouldn't surprise me at all if city and state governments started to burn down empty houses to lessen supply in an attempt to keep house prices up - after all, property taxes are going to drop significantly with the house price deflation.
http://en.wikipedia.org/wiki/Household_income_in_the_United_States
Monday, January 5, 2009
Commercial real estate headed for collapse
It appears that 2009 will be a horrible year for commercial real estate. Just as with residential housing there are way too many new office buildings and strip malls. In my city about one bazillion strip malls have been built over the past few years and I always wondered who was going to rent them? I think a significant portion will go bankrupt and many others will have to reduce rent to the point that they aren't making much money on them. There are estimates that up to 20% of retailers will go belly-up this year. That's going to create a huge inventory problem for commercial real estate - and the banks who financed all of it. It's going to get ugly.
NEW YORK: Vacancy rates in office buildings exceed 10 percent in virtually every major city across the United States and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for the beleaguered financial sector.
With job cuts rampant and businesses retrenching, more empty space is expected from New York to Chicago to Los Angeles in the coming year. Rental income would then decline and property values would slide further. The Urban Land Institute predicts 2009 will be the worst year for the U.S. commercial real estate market "since the wrenching 1991-1992 industry depression."
http://www.iht.com/articles/2009/01/04/business/real.php
Update: Office space in Manhattan is cratering.
Jan. 6 (Bloomberg) -- Manhattan office rents fell the most in at least two decades last quarter as securities firms cut jobs and tenants leased less space.
Fourth-quarter rents dropped 4.8 percent to $69.44 a square foot from the third quarter, broker Cushman & Wakefield Inc. said in a report today.
Leasing slid to the lowest since 2001 as companies signed up for 19.1 million feet of space last year. Lehman Brothers Holdings Inc.’s bankruptcy, the acquisition of Merrill Lynch & Co. and the steepest plunge in U.S. stocks since the Great Depression last year contributed to the highest vacancy rates since May 2006.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aZZvAeQPTd_Q&refer=worldwide
NEW YORK: Vacancy rates in office buildings exceed 10 percent in virtually every major city across the United States and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for the beleaguered financial sector.
With job cuts rampant and businesses retrenching, more empty space is expected from New York to Chicago to Los Angeles in the coming year. Rental income would then decline and property values would slide further. The Urban Land Institute predicts 2009 will be the worst year for the U.S. commercial real estate market "since the wrenching 1991-1992 industry depression."
http://www.iht.com/articles/2009/01/04/business/real.php
Update: Office space in Manhattan is cratering.
Jan. 6 (Bloomberg) -- Manhattan office rents fell the most in at least two decades last quarter as securities firms cut jobs and tenants leased less space.
Fourth-quarter rents dropped 4.8 percent to $69.44 a square foot from the third quarter, broker Cushman & Wakefield Inc. said in a report today.
Leasing slid to the lowest since 2001 as companies signed up for 19.1 million feet of space last year. Lehman Brothers Holdings Inc.’s bankruptcy, the acquisition of Merrill Lynch & Co. and the steepest plunge in U.S. stocks since the Great Depression last year contributed to the highest vacancy rates since May 2006.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aZZvAeQPTd_Q&refer=worldwide
Sunday, January 4, 2009
Medicaid spending unsustainable
Medicaid is a huge expenditure for both the states (some states it's over 30% of their budget) and the federal government, yet little is being said on adressing this issue during the current crash of the US economy. According to this report Medicaid spending is unsustainable:
http://www.cms.hhs.gov/apps/media/press/release.asp?Counter=3311
“This report should serve as an urgent reminder that the current path of Medicaid spending is unsustainable for both federal and state governments. We must act quickly to keep state Medicaid programs fiscally sound,” Secretary Leavitt said. “If nothing is done to rein in these costs, access to health care for the nation’s most vulnerable citizens could be threatened.”
. . . . . . .
At this rate, Medicaid growth is projected to slightly exceed growth in overall health care expenditures, which is projected by CMS actuaries and economists to increase by 6.7 percent per year over the next 10 years, or over twice the rate of general inflation. Additionally, Medicaid’s share of the Gross Domestic Product (GDP) is projected to reach about three percent in 2017. The combined share of GDP spending for Medicare and Medicaid is projected to be 6.9 percent by 2017.
Now with the contraction occuring in US GDP the percentage numbers are going to be much higher. With deflation now occurring (e.g. housing) it is unclear if there will be deflation in healthcare too (doubtful), especially if the state and federal governments are supposed to pay for it.
I will be very interested to see if state and federal governments actually try to reduce spending for Medicaid and what would they cut? The idea has been that everyone is entitled to excellent healthcare - would the government actually try to take healthcare benefits away from people? I just don't see that happening. If states aren't going to address their #1 budget item then where are they going to cut spending? Or are they instead going to raise every tax and fee they can find to make up for the shortages? Probably the latter - but how well is that really going to work? Where is the money going to come from?
http://www.cms.hhs.gov/apps/media/press/release.asp?Counter=3311
“This report should serve as an urgent reminder that the current path of Medicaid spending is unsustainable for both federal and state governments. We must act quickly to keep state Medicaid programs fiscally sound,” Secretary Leavitt said. “If nothing is done to rein in these costs, access to health care for the nation’s most vulnerable citizens could be threatened.”
. . . . . . .
At this rate, Medicaid growth is projected to slightly exceed growth in overall health care expenditures, which is projected by CMS actuaries and economists to increase by 6.7 percent per year over the next 10 years, or over twice the rate of general inflation. Additionally, Medicaid’s share of the Gross Domestic Product (GDP) is projected to reach about three percent in 2017. The combined share of GDP spending for Medicare and Medicaid is projected to be 6.9 percent by 2017.
Now with the contraction occuring in US GDP the percentage numbers are going to be much higher. With deflation now occurring (e.g. housing) it is unclear if there will be deflation in healthcare too (doubtful), especially if the state and federal governments are supposed to pay for it.
I will be very interested to see if state and federal governments actually try to reduce spending for Medicaid and what would they cut? The idea has been that everyone is entitled to excellent healthcare - would the government actually try to take healthcare benefits away from people? I just don't see that happening. If states aren't going to address their #1 budget item then where are they going to cut spending? Or are they instead going to raise every tax and fee they can find to make up for the shortages? Probably the latter - but how well is that really going to work? Where is the money going to come from?
Saturday, January 3, 2009
No incentive for banks to renegotiate mortgages
I see no reason or incentive for banks to renegotiate mortgages. One is that the big banks that bought up the failed banks have essentially already taken the losses by buying the failed bank's assets for pennies on the dollar. Also, thanks to the Treasury dept. changing tax laws on their own, the big banks could write off the losses of the failed banks' losses on their taxes. Also, why would the banks renegotiate any mortgages and take a principal hit when it is very likely that the US government will come to everyone's rescue with more bailouts, assistance programs, etc.? The US government is printing free money and the new administration has promised to continue to do so - why not wait for more free money to be handed out?
Another area is mortgage service companies. The banks tend to not handle the mortgages directly, but instead outsource the work by using mortgage service companies. These companies have no incentive as to whether the house is foreclosed on or not - they get payed the same.
But any fraud, mistakes, or violations made during the origination of the mortgage loan have been quickly covered up through the mortgage securitization process. Loans are packaged into mortgage-backed securities (MBS) and sold to holders which then use trustees to administer the loans. The trustees can not be held accountable for many claims that homeowners have against the company that originated the mortgage.
Trustees, although they may administer the loans, do not lose money when a property goes into foreclosure, as they are paid their fees in any event. The holders of the mortgage securities will lose money as homeowners stop making payments, but one property or another going into foreclosure is a small matter when even one mortgage-backed security may be comprised of hundreds of different loans spread throughout the country. This illustrates the concept of spreading risk around, but it also makes it less worthwhile for MBS holders to care about one or another borrower.
Even further removed from the origination company, MBS holders, and trustees are the mortgage servicing companies, which are hired to collect payments and perform the day-to-day operations necessary to administer the loan. These companies will also be compensated regardless of the success or failure of the loan, and so have little incentive to help homeowners apply for loan modifications or otherwise save their homes.
http://ezinearticles.com/?In-Foreclosure,-Loan-Servicing-Companies-Lose-More-Money-by-Helping-Homeowners&id=1769257
Another area is mortgage service companies. The banks tend to not handle the mortgages directly, but instead outsource the work by using mortgage service companies. These companies have no incentive as to whether the house is foreclosed on or not - they get payed the same.
But any fraud, mistakes, or violations made during the origination of the mortgage loan have been quickly covered up through the mortgage securitization process. Loans are packaged into mortgage-backed securities (MBS) and sold to holders which then use trustees to administer the loans. The trustees can not be held accountable for many claims that homeowners have against the company that originated the mortgage.
Trustees, although they may administer the loans, do not lose money when a property goes into foreclosure, as they are paid their fees in any event. The holders of the mortgage securities will lose money as homeowners stop making payments, but one property or another going into foreclosure is a small matter when even one mortgage-backed security may be comprised of hundreds of different loans spread throughout the country. This illustrates the concept of spreading risk around, but it also makes it less worthwhile for MBS holders to care about one or another borrower.
Even further removed from the origination company, MBS holders, and trustees are the mortgage servicing companies, which are hired to collect payments and perform the day-to-day operations necessary to administer the loan. These companies will also be compensated regardless of the success or failure of the loan, and so have little incentive to help homeowners apply for loan modifications or otherwise save their homes.
http://ezinearticles.com/?In-Foreclosure,-Loan-Servicing-Companies-Lose-More-Money-by-Helping-Homeowners&id=1769257
NASA's rovers on Mars are still going after 5 years
Excellent engineering - they were designed to last 90 days and now they both have survived and are still functioning well after 5 years. JPL has some superior engineers, collaboration and processes to have accomplished such a feat. Luck helped a little too - with dust storms cleaning off the solar panels periodically. They also were able to do quite a bit of science and learning how to use the rovers prior to a several month long dust storm shut down operations for a while. Amazingly, both rovers survived that too. JPL does some very good work.
http://edition.cnn.com/2009/TECH/01/03/mars.rovers.five.years/?iref=mpstoryview
Squyres said the journeys had been motivated by science, but had led to something else important.
"This has turned into humanity's first overland expedition on another planet. When people look back on this period of Mars exploration decades from now, Spirit and Opportunity may be considered most significant not for the science they accomplished, but for the first time we truly went exploring across the surface of Mars."
http://edition.cnn.com/2009/TECH/01/03/mars.rovers.five.years/?iref=mpstoryview
Squyres said the journeys had been motivated by science, but had led to something else important.
"This has turned into humanity's first overland expedition on another planet. When people look back on this period of Mars exploration decades from now, Spirit and Opportunity may be considered most significant not for the science they accomplished, but for the first time we truly went exploring across the surface of Mars."
Friday, January 2, 2009
The milk bubble has popped too
How many more bubbles are going to pop? And, apparently, the US government is going to attempt to re-inflate every bubble with taxpayer money. Everyone is considered a victim, and the US government is coming to every victim's rescue. When will it end?
From the NYT:
The Agriculture Department has committed to buying 111.6 million pounds of milk powder at 80 cents a pound, for roughly $91 million, which includes some handling fees. Before October, the last time the government bought milk powder was in June 2006, and it was eventually used in government nutrition programs, given away as animal feed or sold on the open market, said Steve Gill, director of commodity operations for the department.
He said the agency has not decided what to do with the cache of milk powder in California.
Some critics of farm subsidies argue that price support programs are antiquated and allow farmers to continue producing even when the economics make no sense, as taxpayers will always buy up the excess production.
“They don’t want to downsize or respond to the market signal. They want to keep producing,” said Kenneth Cook, president of the Environmental Working Group, a Washington research organization that has long been critical of the government’s farm policy. “Once you get in a jam like this, it becomes our collective problem.”
The government purchases come after what the department calls a “euphoric period of record prices and booming exports” for the American dairy industry. Since 2003, dairy exports have increased from $1 billion a year to about $4 billion this year, with exports of powdered milk increasing sixfold during that period. Milk powder is an attractive product to export because it does not require refrigeration, has a long shelf life and can be used to make numerous beverages and foods.
http://www.nytimes.com/2009/01/02/business/02dairy.html?pagewanted=1&ref=business
From the NYT:
The Agriculture Department has committed to buying 111.6 million pounds of milk powder at 80 cents a pound, for roughly $91 million, which includes some handling fees. Before October, the last time the government bought milk powder was in June 2006, and it was eventually used in government nutrition programs, given away as animal feed or sold on the open market, said Steve Gill, director of commodity operations for the department.
He said the agency has not decided what to do with the cache of milk powder in California.
Some critics of farm subsidies argue that price support programs are antiquated and allow farmers to continue producing even when the economics make no sense, as taxpayers will always buy up the excess production.
“They don’t want to downsize or respond to the market signal. They want to keep producing,” said Kenneth Cook, president of the Environmental Working Group, a Washington research organization that has long been critical of the government’s farm policy. “Once you get in a jam like this, it becomes our collective problem.”
The government purchases come after what the department calls a “euphoric period of record prices and booming exports” for the American dairy industry. Since 2003, dairy exports have increased from $1 billion a year to about $4 billion this year, with exports of powdered milk increasing sixfold during that period. Milk powder is an attractive product to export because it does not require refrigeration, has a long shelf life and can be used to make numerous beverages and foods.
http://www.nytimes.com/2009/01/02/business/02dairy.html?pagewanted=1&ref=business
Here come the traffic tickets as a "tax"
Just as I thought states and cities are gearing up to increase the issuance of traffic tickets to make up for falling tax revenue.
http://articles.moneycentral.msn.com/Insurance/InsureYourCar/speeding-youll-pay-higher-taxes.aspx
Garrett and his co-author, Gary Wagner, studied tickets issued by North Carolina counties over 14 years and found that "significantly more tickets are issued in the year following a decline in revenue."
But in years after revenue increases, there was no corresponding drop in traffic tickets, they wrote. "Our results suggest that tickets are used as a revenue generation tool rather than solely a means to increase public safety."
Ya think? Once a government entity finds a way to increase revenues it is essentially impossible for that entity to decrease the new revenue stream later on - it almost always becomes permanent. Personal income tax was supposed to be temporary when it was created in 1913 and has been increasing ever since. Most consumption taxes follow the same trend.
We will see many more programs such as red light cameras, automated speed traps (e.g. on toll roads and intersections), police assigned to and awarded for issuing more tickets, increases in fines, etc. Governments have become voracious in their spending and will go to extremes to keep the revenue streams coming in - the option of reducing spending or cutting programs is no longer considered a viable option.
http://articles.moneycentral.msn.com/Insurance/InsureYourCar/speeding-youll-pay-higher-taxes.aspx
Garrett and his co-author, Gary Wagner, studied tickets issued by North Carolina counties over 14 years and found that "significantly more tickets are issued in the year following a decline in revenue."
But in years after revenue increases, there was no corresponding drop in traffic tickets, they wrote. "Our results suggest that tickets are used as a revenue generation tool rather than solely a means to increase public safety."
Ya think? Once a government entity finds a way to increase revenues it is essentially impossible for that entity to decrease the new revenue stream later on - it almost always becomes permanent. Personal income tax was supposed to be temporary when it was created in 1913 and has been increasing ever since. Most consumption taxes follow the same trend.
We will see many more programs such as red light cameras, automated speed traps (e.g. on toll roads and intersections), police assigned to and awarded for issuing more tickets, increases in fines, etc. Governments have become voracious in their spending and will go to extremes to keep the revenue streams coming in - the option of reducing spending or cutting programs is no longer considered a viable option.
Thursday, January 1, 2009
Predictions for 2009
Below is a list of predictions that I tend to agree with from here:
http://market-ticker.denninger.net/archives/689-Where-We-Are,-Where-Were-Heading-2009.html
The economy will not recover in 2009. Job loss will continue through the year and unemployment will reach 8% in the "headline" statistic by the end of the year. U-6 (broad unemployment, or the closest to "real" unemployment without government "cooking") will top 15%. All the "talking heads" are predicting a turnaround in the second half of 2009. They will be wrong. Look at their records for 2008 - all of them were predicting closes at or above 1500 for the S&P 500. Why does CNBC continue to put people on the air who, if you listened to them, cost you 40% or more of your money?
Deflation, not inflation, will become evident well beyond housing. Other capital goods beyond housing will see real price declines for the first time since the 1930s. Debt is inherently deflationary; the "hyperinflationists" will once again be shown to be wrong (how many years running will it be now?)
Housing prices will continue to decline. I believe we're about halfway done with the price correction. Those who think we will turn this in 2009 are wrong - unless we get an all-on collapse in prices in early 2009, which I do not believe will occur. I've heard several claims we will have positive year-over-year home price changes in 2009. I'll take the other side of that bet.
The Fed's attempt to "pump liquidity" will be shown to be an abject failure. We will see either a Treasury Market selloff or worse, severe instability in the dollar at some point in 2009.
GDP will post a 12-month negative number and there is a decent shot that we will actually see an official depression print before the end of 2009, defined as a 10% decline peak-to-trough.
The Stock Market has not bottomed although you may think it has for a few months. The annual range will be quite extreme; I would not be surprised at all to see 1,000 touched on the SPX in the first part of the year. I believe the SPX will at least touch 500 in the next 12-24 months and the current bottom will not hold. It is possible that we could see a crash to SPX 300 and DOW 3,000 some time this year, probably after the spring (when the "Obama Halo" wears off - if it isn't blown off by economic events first.) Yes, this means I am predicting a fifty percent swing in the SPX in 2009. Lots of money to be made as a trader if you're quick and good, but an absolute minefield if you're a long-term investor.
Precious metals will not be a safe haven. The callers for $1600 and above on gold will be wrong, unless there is a major military conflict. I do not rate that probability as particularly high, but it is an event (along with a major terrorism incident - nuclear or biochemical - that would cause a rocket shot in Gold prices), so I am hedging that call. The risk of this sort of "response" to the economic crisis is, however, real, and will rise significantly going into 2010 and beyond. We'll revisit this one (a major war) next year.
The Dollar will not collapse. This is not because we're in great shape or will truly recover, it is because the rest of the world is in worse shape than we are. Last year pundits were all calling for the dollar to collapse to 40 - it didn't happen. Now they're calling the dollar's strength a "Bear market rally." Nonsense; the simple truth is that while we're in bad shape the rest of the world is literally on the precipice of a full-on collapse. European banks are more-levered and less-transparent than our banks as just one example.
The pound or euro - and perhaps both - will likely be where the FX dislocation initiates if it occurs. I see the potential for the pound and euro to both reach par with the dollar, although I'm not going to go that far out on the tree limb and predict it - yet. Needless to say that would rocket the Dollar Index but it won't be our strength that does it - it will be their weakness.
The US Consumer will go from a negative savings rate to a seriously-positive one. I am predicting 4% in 2009 but it could go as high as 10%. The math on this is simple - the "consumerist legion of more" has run its course and all that's left is debt. It hurts and bad; expecting the American Consumer to cut off his other arm is just plain dumb. By the way this is a good thing in the longer term for America once the excess debt is forced out and defaulted through the system.
Commercial Real Estate will effectively collapse and most commercial Real Estate REITs will be either insolvent or limping on life support. There will be calls for bailouts (which may be attempted; the calls are already starting to be heard) but it won't matter - a failed business is a failed business, bailout or no, and overcapacity must go away before sustainable business conditions can return.
Along with the above, expect 10% of all retail stores to close, and that number could go as high as 20%. That's not going to be fun; there will be hundreds of malls that wind up literally shuttered across America. Stay away from most retailers and property groups as investments. Firms like SPG and VNO are levitating on the strength of their dividends (7-10% yields at present); I believe this is a sucker play; if retailer defaults force dividend cuts (and I believe they will) the commercial REITs will go straight into the toilet.
Several states will get in serious financial trouble and outright default of one or more is possible in 2009. California leads this parade. But even if there is a default on a state basis, the effect will be highly localized, as county and municipal governments vary in their wisdom and budget process. The real pain comes in state-wide social and educational programs. Be very careful if you are in municipal bonds or thinking of getting back into them (I recommended they be dumped in 2007 - look at what has happened to the closed-end funds in 08! Aieeee!) as the default risk is VERY REAL. If you're buying individual issues and do the work to determine not only the risk of default but also the likely recovery if they do default there are some good deals out there - but only if you're doing the work. "Trust me" (as in buying funds, whether mutual funds or closed-end stuff) is very dangerous.
Mortgages are not done. The story last year was "Subprime." This year's will be "ALT-A", "Option ARMs" and so-called "Prime". The Fed and Treasury know this, which is why they are playing games with "agency" debt in a desperate attempt to clear this market before the ticking nuclear devices go off. The amount of debt involved in these "bad deals" is vastly higher than that in the "subprime" space and if they fail to contain it (a near certainty) Round #2 of severe bank instability gets served up on us in the second half of 2009.
If you want to refinance a mortgage you may get one brief shot at it with long rates around 4%. You're nuts to buy outright unless you intend to die in the home, but if you have a solid reason to be obtaining a mortgage or wish to refinance you will probably get the opportunity. This assumes the "buydown game" gets going before Treasuries dislocate; if you get the opportunity take it as it is likely to be fleeting. The few places in this country where homes wind up selling for 2.5x incomes (on average) and you have an opportunity to finance at 4% and change will be decent buying opportunities - if you're sure you can cash flow the note (e.g. your job and/or income stream is not in any danger of collapsing.)
Those who have said that the corporate bond market is being "unreasonable" in its expectation for defaults will start to look like the jackasses they are. Actual default rates (not projections) on non-investment-grade debt will skyrocket starting in 2009 and there will be no sign of it turning around this year. If you're playing in this area of the market thinking that "the worst is behind us", I hope you like walking around bald as the haircuts handed out to folks like you will be especially severe and delivered with a straight razor.
The calls for "more lending" to consumers and businesses will go exactly nowhere. The problem isn't credit availability - there's plenty of money available to lend if you are credit-worthy. Those who are being turned down now simply aren't credit-worthy when one looks at what they want to do with the money and what they're backing their repayment capacity with. The more "credit stimulus" is thrown into the economy (and there will be more) the worse the downturn will get.
General Motors and Chrysler will fail to meet their targets and it will be labor that sinks the deal. At least one and probably both will wind up in some form of bankruptcy in 2009. The UAW is insane; Gettlefinger needs to be strung up by his genitals and pelted with rotten tomatoes by his union "brothers", and if they had a lick of sense they'd have already done it. They obviously don't. I give this mess six months tops, with Ford as the only possible survivor. The recent GMAC games show exactly how desperate they are; 0% 5 year loans to people with 620 FICO scores are flat-out insane and the default rates on those loans are going to wind up in economics textbooks five years hence.
Protectionism and currency manipulation will rear their ugly heads in 2009, originating not here but in Asia as their economies go straight into the toilet. China and Japan are at severe risk here.
Commodities will appear to be headed for a new bull market but this will turn out to be a false hope as demand continues to collapse. Attempts to manage oil output to prop up the price will fail. Several oil-producing nations will find themselves in serious economic trouble, with Russia being in the lead but by no means alone.
Sovereign debt defaults will number at least three with many other nations on "watch" for same; we had one last year (Iceland.) Noise about a US "AAA" downgrade will continue. Highest on the list for probables are Russia, which needs oil at roughly double its current price - and stable - to be financially viable. Not going to happen in the near term.
China will have its first large-scale rumbling of civil unrest as a consequence of collapsing export demand and thus employment. They'll manage to tamp it down - this year. Don't take a bet on that holding together longer-term. Those who think China will be "ok" are deluded; they have a horrifying overcapacity problem (debt-financed, of course) and there is no way for them to get out of it. They are truly going to "take it in both holes" down the road, but the worst of it won't be in 2009 - that is still a year or two in the future.
Foreign uptake of Treasuries will be choked off - by necessity. It won't be because they want to screw the US (although they should have a long time ago, given our profligate and unsustainable habits), it will be because they will be forced to redirect their resources inward as their own economies collapse.
"The City" (London to be precise, Britain generally) will be recognized as getting it "worse than we are" (in America.) This will be the first of many validations of my thesis "we're screwed, they're gang-raped."
Things will get "revolting" in a number of nations. Not here in America. Yet. If we're lucky the American Sheep will wake up and stage some of that peaceful protest stuff I outlined above. If we're not so fortunate 2010 could be really bad.
http://market-ticker.denninger.net/archives/689-Where-We-Are,-Where-Were-Heading-2009.html
The economy will not recover in 2009. Job loss will continue through the year and unemployment will reach 8% in the "headline" statistic by the end of the year. U-6 (broad unemployment, or the closest to "real" unemployment without government "cooking") will top 15%. All the "talking heads" are predicting a turnaround in the second half of 2009. They will be wrong. Look at their records for 2008 - all of them were predicting closes at or above 1500 for the S&P 500. Why does CNBC continue to put people on the air who, if you listened to them, cost you 40% or more of your money?
Deflation, not inflation, will become evident well beyond housing. Other capital goods beyond housing will see real price declines for the first time since the 1930s. Debt is inherently deflationary; the "hyperinflationists" will once again be shown to be wrong (how many years running will it be now?)
Housing prices will continue to decline. I believe we're about halfway done with the price correction. Those who think we will turn this in 2009 are wrong - unless we get an all-on collapse in prices in early 2009, which I do not believe will occur. I've heard several claims we will have positive year-over-year home price changes in 2009. I'll take the other side of that bet.
The Fed's attempt to "pump liquidity" will be shown to be an abject failure. We will see either a Treasury Market selloff or worse, severe instability in the dollar at some point in 2009.
GDP will post a 12-month negative number and there is a decent shot that we will actually see an official depression print before the end of 2009, defined as a 10% decline peak-to-trough.
The Stock Market has not bottomed although you may think it has for a few months. The annual range will be quite extreme; I would not be surprised at all to see 1,000 touched on the SPX in the first part of the year. I believe the SPX will at least touch 500 in the next 12-24 months and the current bottom will not hold. It is possible that we could see a crash to SPX 300 and DOW 3,000 some time this year, probably after the spring (when the "Obama Halo" wears off - if it isn't blown off by economic events first.) Yes, this means I am predicting a fifty percent swing in the SPX in 2009. Lots of money to be made as a trader if you're quick and good, but an absolute minefield if you're a long-term investor.
Precious metals will not be a safe haven. The callers for $1600 and above on gold will be wrong, unless there is a major military conflict. I do not rate that probability as particularly high, but it is an event (along with a major terrorism incident - nuclear or biochemical - that would cause a rocket shot in Gold prices), so I am hedging that call. The risk of this sort of "response" to the economic crisis is, however, real, and will rise significantly going into 2010 and beyond. We'll revisit this one (a major war) next year.
The Dollar will not collapse. This is not because we're in great shape or will truly recover, it is because the rest of the world is in worse shape than we are. Last year pundits were all calling for the dollar to collapse to 40 - it didn't happen. Now they're calling the dollar's strength a "Bear market rally." Nonsense; the simple truth is that while we're in bad shape the rest of the world is literally on the precipice of a full-on collapse. European banks are more-levered and less-transparent than our banks as just one example.
The pound or euro - and perhaps both - will likely be where the FX dislocation initiates if it occurs. I see the potential for the pound and euro to both reach par with the dollar, although I'm not going to go that far out on the tree limb and predict it - yet. Needless to say that would rocket the Dollar Index but it won't be our strength that does it - it will be their weakness.
The US Consumer will go from a negative savings rate to a seriously-positive one. I am predicting 4% in 2009 but it could go as high as 10%. The math on this is simple - the "consumerist legion of more" has run its course and all that's left is debt. It hurts and bad; expecting the American Consumer to cut off his other arm is just plain dumb. By the way this is a good thing in the longer term for America once the excess debt is forced out and defaulted through the system.
Commercial Real Estate will effectively collapse and most commercial Real Estate REITs will be either insolvent or limping on life support. There will be calls for bailouts (which may be attempted; the calls are already starting to be heard) but it won't matter - a failed business is a failed business, bailout or no, and overcapacity must go away before sustainable business conditions can return.
Along with the above, expect 10% of all retail stores to close, and that number could go as high as 20%. That's not going to be fun; there will be hundreds of malls that wind up literally shuttered across America. Stay away from most retailers and property groups as investments. Firms like SPG and VNO are levitating on the strength of their dividends (7-10% yields at present); I believe this is a sucker play; if retailer defaults force dividend cuts (and I believe they will) the commercial REITs will go straight into the toilet.
Several states will get in serious financial trouble and outright default of one or more is possible in 2009. California leads this parade. But even if there is a default on a state basis, the effect will be highly localized, as county and municipal governments vary in their wisdom and budget process. The real pain comes in state-wide social and educational programs. Be very careful if you are in municipal bonds or thinking of getting back into them (I recommended they be dumped in 2007 - look at what has happened to the closed-end funds in 08! Aieeee!) as the default risk is VERY REAL. If you're buying individual issues and do the work to determine not only the risk of default but also the likely recovery if they do default there are some good deals out there - but only if you're doing the work. "Trust me" (as in buying funds, whether mutual funds or closed-end stuff) is very dangerous.
Mortgages are not done. The story last year was "Subprime." This year's will be "ALT-A", "Option ARMs" and so-called "Prime". The Fed and Treasury know this, which is why they are playing games with "agency" debt in a desperate attempt to clear this market before the ticking nuclear devices go off. The amount of debt involved in these "bad deals" is vastly higher than that in the "subprime" space and if they fail to contain it (a near certainty) Round #2 of severe bank instability gets served up on us in the second half of 2009.
If you want to refinance a mortgage you may get one brief shot at it with long rates around 4%. You're nuts to buy outright unless you intend to die in the home, but if you have a solid reason to be obtaining a mortgage or wish to refinance you will probably get the opportunity. This assumes the "buydown game" gets going before Treasuries dislocate; if you get the opportunity take it as it is likely to be fleeting. The few places in this country where homes wind up selling for 2.5x incomes (on average) and you have an opportunity to finance at 4% and change will be decent buying opportunities - if you're sure you can cash flow the note (e.g. your job and/or income stream is not in any danger of collapsing.)
Those who have said that the corporate bond market is being "unreasonable" in its expectation for defaults will start to look like the jackasses they are. Actual default rates (not projections) on non-investment-grade debt will skyrocket starting in 2009 and there will be no sign of it turning around this year. If you're playing in this area of the market thinking that "the worst is behind us", I hope you like walking around bald as the haircuts handed out to folks like you will be especially severe and delivered with a straight razor.
The calls for "more lending" to consumers and businesses will go exactly nowhere. The problem isn't credit availability - there's plenty of money available to lend if you are credit-worthy. Those who are being turned down now simply aren't credit-worthy when one looks at what they want to do with the money and what they're backing their repayment capacity with. The more "credit stimulus" is thrown into the economy (and there will be more) the worse the downturn will get.
General Motors and Chrysler will fail to meet their targets and it will be labor that sinks the deal. At least one and probably both will wind up in some form of bankruptcy in 2009. The UAW is insane; Gettlefinger needs to be strung up by his genitals and pelted with rotten tomatoes by his union "brothers", and if they had a lick of sense they'd have already done it. They obviously don't. I give this mess six months tops, with Ford as the only possible survivor. The recent GMAC games show exactly how desperate they are; 0% 5 year loans to people with 620 FICO scores are flat-out insane and the default rates on those loans are going to wind up in economics textbooks five years hence.
Protectionism and currency manipulation will rear their ugly heads in 2009, originating not here but in Asia as their economies go straight into the toilet. China and Japan are at severe risk here.
Commodities will appear to be headed for a new bull market but this will turn out to be a false hope as demand continues to collapse. Attempts to manage oil output to prop up the price will fail. Several oil-producing nations will find themselves in serious economic trouble, with Russia being in the lead but by no means alone.
Sovereign debt defaults will number at least three with many other nations on "watch" for same; we had one last year (Iceland.) Noise about a US "AAA" downgrade will continue. Highest on the list for probables are Russia, which needs oil at roughly double its current price - and stable - to be financially viable. Not going to happen in the near term.
China will have its first large-scale rumbling of civil unrest as a consequence of collapsing export demand and thus employment. They'll manage to tamp it down - this year. Don't take a bet on that holding together longer-term. Those who think China will be "ok" are deluded; they have a horrifying overcapacity problem (debt-financed, of course) and there is no way for them to get out of it. They are truly going to "take it in both holes" down the road, but the worst of it won't be in 2009 - that is still a year or two in the future.
Foreign uptake of Treasuries will be choked off - by necessity. It won't be because they want to screw the US (although they should have a long time ago, given our profligate and unsustainable habits), it will be because they will be forced to redirect their resources inward as their own economies collapse.
"The City" (London to be precise, Britain generally) will be recognized as getting it "worse than we are" (in America.) This will be the first of many validations of my thesis "we're screwed, they're gang-raped."
Things will get "revolting" in a number of nations. Not here in America. Yet. If we're lucky the American Sheep will wake up and stage some of that peaceful protest stuff I outlined above. If we're not so fortunate 2010 could be really bad.
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