NEWS #86

From February 23, 2009 to March 19, 2009

March 19, 2009

This link was sent by Keith. Here is that link to 'U.S., China Increase Trade Deficit: Win-Win Situation', by Howard Richman of SeekingAlpha.Com. I quote it below.

"During a worldwide recession, such as the one that began in October, the volume of trade falls as a result of falling demand. If the ratio of imports to exports stays about the same, the lower trade volume temporarily reduces the extent of any deficit or surplus. Indeed, America's overall trade deficit went down in January due to the fall-off in world trade.

However, from January 2008 to January 2009, the ratio of our imports to exports with China worsened. In January 2008 China sold us 4.5 times the goods that they bought from us, while in January 2009 China sold us 5.9 times.

America's strategy, under Presidents Bush and Obama, has been to borrow money from China in order to pay for increasing budget deficits, giving away American market share to Chinese producers:"

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Yesterday I promised I would comment on an Essay titled 'Limited Debt' by Thomas Geoghegan, which appears in the April 2009 volume of Harpers Magazine. I am sorry, but there is no link available to this article. Note that I do not agree with everything the author says. Any words within brackets are my own.

Mr. Geoghegan is an attorney by trade, who represents unions. He works in Chicago and is more than familiar with the workings of the financial industry in that city. Mr. Geoghegan sees history as a battle between interest groups.

Mr. Geoghegan begins by pointing out that in June 2008 the number of collection cases before the circuit court of Cook County came to over 130,000. That is double the number in 2000 [Certainly that number has swelled since then]. He then goes on to ask:

"What's the worst of all the legal changes that fill up collection courts? There are so many, but I'd pick the legalization of usury. It's the form of deregulation that not only drove us into debt but also sped up the loss of the manufacturing jos that created our middle class - that, in short, brought about our current Time of Troubles."

Later the author mentions that Monsignor Jack Egan foresaw the problems of dismantling the usury laws.

"He could see, years before the rest of us: this fight against the banks was like the fight to unionize, it was like the civil rights movement. He knew, as the rest of us did not, where an Alinsky, a Reuther, a King would be - they'd be marching on the banks."

The author goes on to point out that our financial collapse is not the result of some technical glitch, that it is not the result of the deregulation of the New Deal, but is the result of much more ancient laws [like usury].

Mr. Geoghegan goes on to point out how companies have used Chapter 11 to shed contract rights and pension obligations. I quote:

"As one company after another 'regorganized' in Chapter 11 to shed contract rights, working people learned that it was not rational to count on those rights and guarantees, or even to think in those future-oriented ways. No wonder people in our country began to live for the moment and take out loans and start running up debts.

And then we dismantled the most ancient of human laws, the law against usury, which had existed in some form in every civilization from teh time of the Babylonian Empire to the end of Jimmy Carter's term, and which had been so taken for granted that no one ever even mentioned it to us in law school. That's when we found out what happens when an advanced industrial economy tries to function with no cap at all on interest rates.

Here's what happens: the financial sector bloats up. With no law capping interest, the evil is not only that banks prey on the poor (they have always done so) but that capital gushes out of manufacturing and into banking.

...What is history, really, but a turf war between manufacturing, labor, and the banks? In the United States, we shrank manufacturing. We got rid of labor. Now it's just the banks. Which is why the middle class is shrinking."

The author reinforces this with the following:

"In 2002 and 2003, financial firms took more than 40 percent of the profits that accrued to U.S. corporations - that's according to the Bureau of Economic Analysis. Anyway, the point is that 40 percent is more than double the share the financial industry was taking - about 18 percent - when Ronald Regan left office and interest rates were just beginning to really climb."

The author then points out that even manufacturing got into the financial act. Some accused GM of build cars only to have a reason to loan money on them.

"Everything followed from this. The bloating of the financial sector helped create the growing U.S. trade deficits, which brought in a flood of cheap money for borrowing - which helped further bloat the financial sector. Look at the timing. The big trade deficits came at about the time the caps on interest rates came off, in the late 1970s. Capital flowed out of manufacturing, with its 'low' profits, and into the financial sector, where profits were much higher."

The author states that since 1972, the median hourly wage for men had remained basically flat, and has actually declined for the bottom fifth of workers. [This is based upon faulty figures for the real inflation we have seen (see yesterday's comments). If the real inflation figure were available I believe it would throw the next highest fifth of workers into the 'declining wages' catagory.] The author then points out that this occurred during a period when productivity nearly doubled. The author blames wage stagnation [ which I believe to be very real] on workers decreasing ability to organize [ this is one point where I disagree with the author]. Family income went up since 1972 because more people were working and they were working longer hours.

The author then goes on to blame the breaking of the unions, the breaking of long term contractual rights, the abandonment of company pensions actually led to people's declining savings rates [ this is a long stretch for me]. He does make a valid point when he states that when planning for the future no longer makes sense, people will quit saving [ what he does not account for is the huge rise in 401Ks and IRAs].

Mr. Geoghegan does make a valid point when he points to a shift in the thinking of the financial industry toward principal. When usury laws were still with us banks thought of principal as preminent, and they certainly expected, and wanted to get the principal returned to them. With the elimination of usury laws banks think differently about principal. At 2 percent interest principal is king and credit worthiness is critical. At 16 to 30 percent interest bankers don't ever want to see the principal again...just keep those payments rolling in each month, thank you. And credit worthiness...well that really is not a concern at the higher rates. Oh, and have you noticed how much banks rely on fees now for income. That also came with the colapse of anti-usury laws.

The author contends that dismantling the usury laws led to the loss of our best middle class jobs.

"First, thanks to the uncapping of interest rates, we shifted capital into the financial sector, with its relatively high returns. Second, as we shifte capital out of globally competitive manufacturing, we ran bigger trace deficits. Third, as we ran bigger trade deficits, we required bigger inflows of foreign capital. We had 'cheap money' flooding in from China, Saudia Arabia, and even the fourth world. May God forgive us - we even had capital coming in from Honduras. Fourth, the banks got even more money, and they didn't even consider putting it back into manufacturing. They stuffed it into derivatives and other forms of gambling, because that's the kind of thing that got the 'normal' big return; i.e. not 5 percent but 35 percent or even more." [I think this last point is telling. We have allowed the banks to think in terms of 35 percent profit, when it may not be in the rest of our best interests for them to make that.].

And here is one more quote from this long article.

"And meanwhile we lost more and more skill-based jobs. Oh, we had jobs, and even jobs that required college and postgraduate educations. But we stopped being skill-based workers. We became 'knowledge workers,' dependent on the financial sector. And knowledge workers, unlike skill-based workers, don't have the bargaining power to get higher wages out of rising productivity. What can they withhold? They can't withhold knowledge. And since they have nothing to withhold, it's much trickier for knowledge-based workers to get a higher wage. And if there are fewer skill-based workers, it becomes harder to raise wages in general. And if it's harder to raise wages, then more of us go into debt."

I don't agree with all that Mr. Geoghegan says. But he makes some good arguements. Why is it in the best interests of all Americans that the banks charge huge rates on credit cards? Think of the productivity flowing into banks from card holders that could better be used in other places. If all credit card interest rates were dropped by five percent that might give workers a one percent increase in spending power. That one percent would represent a huge number in that it would go toward buying new stuff rather than paying off old stuff. Think about it.

March 18, 2009

I have a lot of links for readers today. These first two were sent by Ben Smith. Both are great reads:

'An Investor's Guide to Bear Markets', by John C. Lee of SeekingAlpha.Com.

'Natural Gas Rigs Shutting Means Prices May Double', by Reg Curren of Bloomberg.Com.

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From March 23, 2009 issue of Time Magazine:

The latest issue of Time Magazine contained a number of quotes to be considered. Here are some of them. Any words in brackets are my own.

From Page 15: "No corporate entity 'too big to fail' is too small to regulate. We must do it, and in a way that, maybe for the first time, puts the public interest first." [This is, of course, something I have already said. Loans on houses are so critical to the nation's interests that I don't think anyone who is not regulated should be allowed to be in the business. By that, I am not refering to people who make fewer than 2 loans per year or 20 loans in a ten-year period.]

'CNBC Under Fire: Sticking Up for the Big Guy?', by James Poniewozik.

"To watch CNBC today is to enter an alternative universe, where elites are populists, Wall Street is Main Street and bank executives are the oppressed. It's not surprising that a voice of opposition to the new Administration would emerge. But who would have thought it would be on a channel not owned by Rupert Murdoch?

CNBC's answer has been to dive off both sides of the line at once. On the silver-lining-hunt side, its straight-news interviewers now spend uncomfortable days (even when not talking about parent company GE's woes) pleading with gloom-saying guests to declare a bottom to the market or find stock picks. 'Do you have just one?' Steve Liesman asked an investment adviser, almost plaintively.

On the ranting side, it has increasingly pinned the state of the economy on the two-month-old Administration, with Cramer offering recommendations to "Obama-proof your portfolio," a phrase that now comes up regularly on CNBC's air. (In response, The Daily Show aired a clip reel of the network's bad calls during the bubble, suggesting viewers might prefer to CNBC-proof their portfolios.)" [Cramer has long been open to this kind of criticism. Anyone who makes over a thousand public stock recommendations a year is going to get some calls wrong. Sometimes Cramer's calls are disasterously wrong. To be fair, Rick Santelli's rant about people who gamble on houses taking the hit had a lot of truth in it. That is why it stung so many so hard. Santelli's philosophy, offered many times before his 'rant', is that people are taking risks all the time, that life itself is a risk. Risk is everywhere, and sometimes when you take a risk you lose.]

'Obama's Reform Agenda: Is He Trying to Do Too Much?', by David Von Drehle and Michael Scherer.

"As director of the Office of Management and Budget, Peter Orszag is a card-carrying numbers guy. But lately Orszag has been reading up on that aspect of the economy ungoverned by numbers: the realm of groundswell and mojo - our 'animal spirits,' in the vivid words of economist John Maynard Keynes. Spirits such as trust, belief and confidence. When surging, these spirits can turn a slump into a boom and a boom into a bubble, but once they shatter, it's a devilish job trying to resurrect them. That's because other animal spirits rise up to take their place: doubt, fear, even panic." [Indeed, we have not seen the last of panic. I am concentrating on playing these markets down right now. The upside does not interest me. I am looking for a short in Apple right now, as it tends to fall into April.]

'Commentary: The Trouble with Obama's New Deal', by Newt Gingrich.

"In this environment, the only two relevant objectives are creating jobs and restoring financial institutions to functional stability. Yet the Obama budget has the potential to do exactly the opposite.

If the country's No. 1 priority is to create jobs, then a hidden $1,300-per-family energy-tax increase in the guise of a cap-and-trade system is absolutely destructive. Herbert Hoover raised taxes in 1932, and it further crippled the economy." [I often wonder if government isn't trying to do too much. Perhaps less spending on bailouts and reductions on taxes is in order...kind of doing less with less.]

'The Great Bond Bailout', by Justin Fox.

"You're ticked off about the bank bailouts. Furious. You think somebody - other than you and your fellow taxpayers - needs to pay. Let's try to work out who that somebody ought to be.

The banks' shareholders don't make a promising target. The stock prices of Citigroup and Bank of America, to name two especially dramatic examples, are down more than 90% from their 2007 peaks. There are arguments, relating to incentives for executives and future shareholders, for wiping out current shareholders at the most troubled banks. But that won't pay for anything - the shareholders simply don't have much more value to cough up. Same goes for those who work in the business. Many have lost their job and life savings, and most have seen their salary cut. Yes, there have been egregious bonuses and golden parachutes - and we ought to claw them back - but that won't pay for a trillion-dollar (or more) bailout. Which leaves ... the folks who loaned the banks money. The banks' creditors have been the clearest beneficiaries of the bailouts - leaving them with the most wherewithal to contribute.

...It may be too much to ask small depositors to monitor the risks at the banks where they put their money and pay for getting it wrong. But these bond buyers are pros. If there is to be any market discipline of risk-taking by banks, bond investors ought to be the ones who enforce it by withholding their cash from the bad apples - and paying the price for misjudgments. Plus, a few concessions from creditors could ease the burden on taxpayers dramatically. If Citi's $486 billion in wholesale debt were converted into common shares - admittedly a pretty extreme solution - the company's balance-sheet woes would evaporate. Which is why these arguments have been gaining in popularity. 'I think it's very important that the creditors in this crisis take a hit,' said New York University finance professor Matthew Richardson at an NYU conference in March. 'We need to try to transfer some of the risk from taxpayers to the financial system.'" [I wondered at the time it happened just who was advising the sovereign funds to buy stocks in the likes of Citi, when it was so obvious that many of the big banks were in trouble. Not all financial advisors, no matter how highly placed, no matter how successful in the past, are good advisors for the here and now. That's why so many funds are going belly up, particularly the hedge funds. The old 'buy and hold' crowd certainly is quiet these days.]

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From: 'Illiquidity', by Mr. Practical on Minyanville.Com. Again, any words within brackets are my own.

"Real economic liquidity is generated by productivity, which increases income by either increasing revenues or decreasing expenses, or both. This is what creates real wealth and raises the standard of living. Printing money does nothing to raise the standard of living, and desperate calls for the government to do something in reality does nothing but transfer real wealth from one person to another.

...But banks/brokers accumulated debt securities like derivatives and asset-backed securities in such vast amounts that it is hard to describe. Even communist China is getting worried. Banks accumulated these securities in various forms by first cajoling regulators (or was it the other way around?) into basically eliminating all capital requirements and then using models to tell the regulators what the market would pay, which was complete hogwash. In good times while the debt was being created, regulators like Mr. Greenspan and Mr. Geithner were either fools or, well...fools. [Or was that tools?]

...The problem with bank debt is that the regulators along with the banks never properly applied the fact that the more debt you create, the harder it would be to support that debt and collect on that debt. Now there is so much debt the amount of private capital to buy that debt is insufficient, at least at the price the banks want to sell it at. [Everything has a price, including debt. When you make too much of something, including debt, the price of it has to fall.]

It is a flawed argument that the debt is worth more than the market wants to pay for it. How much the debt is eventually worth is a function of default rates, the level of income being produced by the economy, and the value of the dollar. From what we see now of the economy, default rates will get worse not better; but perhaps it is because there is so much debt that the economy is getting worse. There is simply not enough real income being generated by the economy to support the debt or to support wishful default rates. [Let me repeat this last part: "There is simply not enough real income being generated by the economy to support the debt or to support wishful default rates."]

...So either we are going to ignore the rules or get rid of them. This undoubtedly will allow banks to show better earnings over the next few quarters (thus the rally in stocks) just because they don't have to write down values, even though it changes nothing.

Eventually enough of the debt will either default or be forced to be restructured; then banks will be forced to take even bigger write-offs. Either that or the government will print massive amounts of dollars to buy it up, which will have the same effect on the economy: for then the Chinese will balk and hyper-inflation will ensue like an infection. [So the author is telling us clearly that it is an either/or situation we are now in. Either we get a heaping dose of deflation or we get a heaping dose of hyper-inflation.]

...Companies used to depreciate assets like real estate to zero and hold them there so as to avoid taxes: this was so because most of the companies' stock was held by insiders. As owners sold shares to the public they monetized the value of those assets.

Central banks gave the public leverage to pay for it. The next step was for the public to lever their own assets. Developed economies now have so much debt it is unsupportable by real wealth. We are in the deflation of all deflations. When you create debt (inflation) you increase artificial liquidity; thus, when you destroy debt you reduce liquidity. Lower liquidity, lower prices." [This one also bears repeating: "When you create debt (inflation) you increase artificial liquidity; thus, when you destroy debt you reduce liquidity. Lower liquidity, lower prices."]

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"Developed economies now have so much debt it is unsupportable by real wealth."

Your government has been lying to you about real inflation, to which the financial press is just now turning wise. Now you are starting to read about house prices doubling in ten years. I suspect that in some markets that is conservative. I think that in some markets house prices quadrupled or even sextupled in twenty years. That is asset inflation of the first magnitude. It was asset inflation that the Fed and the FED both studiously excluded from their calculations of inflation. The problem with lying to yourself and your citizens that way (as the Russians found out) is:

1. You can fool all the citizens for some of the time (Lincoln) but eventually you lose all track of where inflation REALLY is.

2. You begin to believe your own numbers and make decisions based upon them. Then you have doomed yourself to failure. That is what we are experiencing now.

Red and White D handed me the latest Harpers magazine this morning. Tomorrow I will have comments from one of its articles.

March 12, 2009

Well, I can only take so much pain. This rally has been painful. I got out of SKF, SIJ, and SRS today. I am keeping my short on DHI. I will look to short again at higher levels.

March 6, 2009

March 5, 2009

The Orange Section sends along these words.

"After reading your comments today I was thinking about the last 10 years that I have been actively following the stock market and economics and I realize that in that time there has been one way that policy makers have used to stimulate the economy: Lowering Interest Rates, specifically the Fed Funds Rate. Actually if one looks to history we can see that since Volker broke the Carter hyper inflationary cycle in 1982 we have seen nothing but interest rate policy as the means through which the Federal Reserve and other entities seek to stimulate an upward trajectory in the economy. That is 27 years of habit building.

Government is not known for its creativity in solving problems. The 27 year old habit is now not working and it is not because the Banks do not want to lend. People who believe that do not understand how banks work. They must lend to make money. The issue is that the qualified credit scores, i.e. the responsible people, are not borrowing much money. Regardless of what the Government does or says, when private individuals get too much debt, they stop spending money. That is what is happening now. The banks aren't lending because they cannot find enough qualified borrowers who need credit.

So if the Federal Government and it's policy makers cannot stimulate the economy via interest rate policy, they are left to find a new tool to make things move. The current government is turning to a combo platter of spreading fear and New Deal-esque polices. Stuff from 80 years ago. This is not a creative solution, this is falling bank on one's laurels. I think they would be better off trying the novel approach of doing nothing and letting Chapter 11 do the work that is needed, but old habits die hard..."

March 4, 2009

Rich Kolon sent this note along. I thought it to be so good that I include it below.

"Bender,

Many years ago, I wrote that "manias end badly".

We just went thru a credit mania, where even unworthy borrowers were loaned big money because the mortgagers thought they could pawn off the risk to pension funds and hedge funds with faulty risk ratings.

This mania should be no different. It will end badly.

Sure the government has tried to bail out the banks, insurance companies, car manufacturers, and the unemployed.

Even though credit is harder to obtain (perhaps now closer to what should be normal?), people are pulling back on consumption even more, fearing their job may be next for the axeman. According to the latest inflation-adjusted statistics, real personal comsumption has dropped to about 93% of real personal disposable income off a high of 97% around early 2007. Americans are trying to build up savings!

Tougher credit and a sharp drop in consumer confidence, based on massive layoffs now underway, is going to devastate the stock market for years.

The government is trying to buy its way out of the problem. Can it really reverse the terror now in American families?

1) You already seen foreigners working for lower wages at your company. Now you lose your job. You lose your income. You can't sell your house. There are too many on sale. It's worth less. The HELOC option is gone. The unemployment check covers too little.

2) Companies think layoffs will save them money. But these same companies did stupid things like spend money to buy their own stock at higher prices! They give huge salaries and bonuses to executives that destroy jobs. Anyone can destroy a job! It takes talent to create one.

3) Despite all the money thrown at businesses that screwed up, we now have a record number of people collecting unemployment checks. And the government is running up annual deficits in the trillions of dollars. How will that ever get paid with real money? What will China do when it can no longer collect on the money it loaned us?

4) The government routinely lies to us. Remember when they "contained" the problems? Nope, it got way out of hand.

5) Obama is a politician. Do you really think he will keep any of his promises? [Edited]

6) Don't look now, but Eastern Europe is undergoing currency devaluations, after they borrowed lots of foreign currencies. Can you say defaults?

This is a huge crisis in confidence that Americans are now facing, thanks to the greed that consumed banks, businesses, politicians, and Wall Street. And it has spread round the world.

The layoffs have to stop to stem the fear. Practically speaking, the government can't stop them. The alternative is that new jobs have to be available to replace the old ones. A worldwide credit crunch does not make that easy.

The only short term solution that might curb the layoffs is to pass a law that dismisses the top paid company executive without future compensation at the same time as any workers get laid off.

Rich"

Keith wrote this note that I thought I would also share.

"Bender,

Obama'a policies are having zero efect at this point. He has been in office all of 6 weeks. Little, if any of the leg!slat!on passed has yet to take effect. Ne!ther his budget or mortgage rescue plan have passed Congress so remain little more than talking points. The economy cannot yet be effected, even on the issue of confidence.

The tools for fighting this recession will be very different by necessity. It will be unlikely the autos and housing will lead us out of the current downturn because there is likely an over supply of both. That's why lowering interest rates isn't making a difference. How can it? The banks will not lend, and even if they would, the interest rates for consumers are nowhere where they ought to be given the level of easing that has taken place. Finally, consumers are not in the mood to buy new homes and cars.

Quantative easing might be the tool that turns the tap on but there is no guarantee that even that will work. The Fed needs to be buying corporate and government debt to put, not capital, but reserves or deposits into the banking system. If banks have enough reverves they will begin to lend again and interest rates for borrowers will fall. The question is though, will people buy houses if mortgages are 3 - 4 percent and auto loans are no more than six percent? If they do, how long (will it be) before the housing inventory is normalized and demand for autos grows? Because the US is a more open economy there will be more leakage of demand as imported goods are purchased - Toyota's rather than Fords.

The outlook is from my vantage point exceedingly glooomy. I do hope I am wrong.

Keith"

The Orange Section writes:

"Bender,

I have been out of the office for awhile and am now just getting caught back up. My son was born on [Edited]. His name is [Edited]. We are overjoyed.

This stimulus package is stimulus for big Government. It is about consolidating power and rewarding those who helped the current party in control gain power. It is not about growing the Private Sector. It is the precisely wrong prescription at the wrong time.

I think we are witnessing the beginnings of a historical shift in the global status quo. Our nation seems to be approaching an identity crisis which is forcing us to focus inward instead of outward. Our economic malaise and status as the world's ultimate consumer has taken serious damage and will continue to erode. Something is going to happen, something major. I just don't know what it is, but that is my gut feeling.

In terms of investing I think we are in the midst of a major transition from a Benjamin Graham world to a Gerald Loeb world."

First, I want to congratulate the Orange Section, and particularly his wife on the birth of their first child.

I am trying to monitor the market, to pick a good place in which to place shorts. Today is encouraging, if not quite right. Perhaps I will see light tomorrow or Friday. Down is the major way to play the markets in 2009. Because most of us think in bullish terms, we have to rethink our priorities. I have to keep reminding myself: cash and shorts, cash and shorts! That's the way to play.

Indeed Rich, what will China do when it realizes it can not collect on the money it has loaned us? So far the Chimerica coalition is holding. But it can break apart at any moment.

And how will the debts we are running up right now get paid in real money? I don't think they ever will. We are watching the process of the U.S. declaring a bankruptcy of sorts. Inflation may not be here now, but it is out there lurking. It is the wolf at the door that we will eventually have to embrace and let into our home.

We are also witnessing the results of a massive failure in corporate governance. Boards of directors have been asleep at the wheel and have utterly failed their duties to the share holders. Since when is any human worth more than a couple million a year to run an enterprise? Don't companies have any bright executives in the wings that will run the place well for less than 5 million a year? And if not, why not? If the top dogs have not developed a stable of ables, they have not done their job anyway and deserve to get the sack.

One other thing that bothers me is the lack of imagination displayed at the top tiers of our government. The FED seems to have one tool: interest rates. Imagine living in a city where the emergency responders only had one tool: a shovel. Anything that comes along gets the shovel treatment. Torando: get the shovel. Flood: get the shovel. Fire: get the shovel. Heart attack: get the shovel. Outbreak of Influenza: get the shovel. That is what is disheartening for me, watching the process work. No new tools. No clear idea of how we got here, and so no clear idea of what to avoid (like too low interest rates for too long or cleaning up the rules of play BEFORE handing out the money).

March 2, 2009

I have been stimulated before. It feels good. But it doesn't last very long.

With my postings in past days and weeks I have been trying to show how the FED screwed up the habit of savings by keeping interest rates so low for so long. Banks found all the money they needed at the Federal trough and individuals found savings unprofitable and moved most of that activity into 401Ks and IRAs, which seemed to pay better.

Boomers now face a world where their 401Ks and IRAs are worth only 60% of what they were worth a year ago, and the markets are probably headed lower. The kids are not through college yet and so savings will be further depleted...and the house...OUCH...the house is worth a lot less than it was a year ago. Things are different now, and it is harder for individuals to plan.

Businesses are also finding it harder to plan. The Federal Governments actions in regards to the bailout are making that a lot more difficult. A friend of mine is in the process of expanding his business. He is rolling out a major project (for him) that may eventually double his business. But, he has to wonder if his competitors (all really big companies) might get some stimulus money from the Federal Government and then decide to compete with him in his little niche. The Bailout is making it harder, not easier, for businesses, large and small, to see the horizon. No vision makes for no planning. No planning makes for no growth.

There is yet another delitorious effect of the Bailout. It means that business will look less and less often to the Banking industry and more and more often to the Federal Government for help in the future. The more imprint the Feds have on the Financial Industry now the weaker it will be in the future.

February 25, 2009

Here is a link to another must read sent by Keith. This is 'There will be blood', by Heather Scoffield of The Globe and Mail. It is a long read and I quote it extensively below.

"And much of today's mess is the fault of central bankers who targeted consumer-price inflation but purposefully turned a blind eye to asset inflation.

...The epicentre is the United States, but the rest of the world, and particularly America's trading partners, will get hit harder than the U.S.

...Therefore, the more an economy depends on the global system, the harder it hurts. Canada is not finding the worst. Asian economies are going to be really slammed this year. But it's an unfair world. The U.S. won't be as badly affected as most countries.

...And yet, because it retains safe-haven status, in a global crisis, investors want to increase their exposure to the U.S. Hence, the dollar rally. Hence 10-year Treasuries down below 3 per cent yields. It's almost paradoxical that an American crisis ... reinforces the status of the United States as a safe haven.

...Part of the point I've been making for years is that it's a fragile system. It broke down once before. The last time we globalized the world economy this way, pre-1914, it only took a war to cause the whole thing to come crashing down. Now we're showing that we can do it without a war. You can cause globalization to disintegrate just by inflating a housing bubble, bursting it, and watching the financial chain reaction unfold.

...It's obvious, surely we know by now, that this is something quite different. It's a crisis of excessive debt, the deleveraging process has barely begun, the U.S. consumers are not going to suddenly bounce back and hit the shopping malls just because they get a tax cut. The savings rate is going to continue to rise.

...We've sort of pushed the home ownership rate up to what seems to be its maximum, and beyond. It will clearly come down. The lesson of the subprime crisis is that you shouldn't give mortgages to people who can't afford them. Duh ...

...This is going to be the beginning of a whole new investment strategy in which companies that can't roll their debt over end up being sold at bargain basement prices, or broken up and their assets sold at bargain-basement prices, in very, very large numbers. And it doesn't take a lot of imagination to see that the buyers will be sovereign wealth funds or other entities in surplus countries. The world divides in two, the debtors and the creditors. The debtors … (U.S., Europe) ... are going to have to sell of their assets. Call it the global foreclosure. They're going to be selling their assets cheaply to those who have the surpluses.

...One of the facts is if you subtract mortgage equity withdrawal from the Bush years, the real underlying rate of growth of the U.S. economy was 1 per cent."

February 23, 2009

Here are links to two good reads. The first is from Keith, who sends 'U.S. stimulus package threatens to let history repeat itself', by Avner Mandelman of the Globe and Mail.

The next link is from Ben Smith who sends 'Why it all went wrong',by Derek DeCloet of the Globe and Mail.

This third link is also from Ben Smith and it is an absolute must read! The article is 'While Rome Burns', by John Mauldin of SafeHaven.Com. I quote this long article below.

"Along came the synchronized global recession and large Polish current-account trade deficits, which were three times those of the US in terms of GDP, just to give us some perspective. Of course, if you are not a reserve currency this is going to bring some pressure to bear. And it did. The Polish zloty has basically dropped in half compared to the Swiss franc. That means if you are a mortgage holder, your house payment just doubled. That same story is repeated all over the Baltics and Eastern Europe.

...The problem is that in Europe there are many banks that are simply too big to save. The size of the banks in terms of the GDP of the country in which they are domiciled is all out of proportion. For my American readers, it would be as if the bank bailout package were in excess of $14 trillion (give or take a few trillion). In essence, there are small countries which have very large banks (relatively speaking) that have gone outside their own borders to make loans and have done so at levels of leverage which are far in excess of the most leveraged US banks. The ability of the "host" countries to nationalize their banks is simply not there. They are going to have to have help from larger countries. But as we will see below, that help is problematical.

...We are going to find out this year whether the European Union is like the Three Musketeers. Are they "all for one and one for all?" or is it every country for itself? My bet (or hope) is that it is the former. Dissolution at this point would be devastating for all concerned, and for the world economy at large. Many of us in the US don't think much about Europe or the rest of the world, but without a healthy Europe, much of our world trade would vanish.

...If the P/E ratio doubles, then you are paying twice as much for the same level of earnings. The difference in price is simply the perception that a given level of earnings is more valuable today than it was 10 years ago. The main driver of the last stock market bubble, and every bull market, is an increase in the P/E ratio. Not earnings growth. Not anything fundamental. Just a willingness on the part of investors to pay more for a given level of earnings.

...If you start in a period of high valuations, you are NOT going to get 8-9-10% a year for the next 30 years; I don't care what their 'scientific studies' say. And yet there are salespeople (I will not grace them with the title of investment advisors) who suggest that if you buy their product and hold for the long term you will get your 10%, regardless of valuations. Again, go to the Crestmont web site, mentioned above. Spend some time really studying it. And then decide what your long-term horizon is.

...As the saying goes, if you only have a hammer, the whole world looks like a nail. Many investment professionals only have one tool. They live in a long-only world. If the markets don't go up, they don't make a profit. So, for them the markets are always ready to enter a new bull phase, or stocks are always a good value. That is what they sell, and that's how they make their money. What mutual fund manager would keep his job if he said you should sell his fund? Frankly, it is a tough world.

About half the time they are right. The wind is at their backs and they look very, very good. Genius is a riding market. And then there are those times when it is just no fun to be them OR their clients.

...And, as bleak as it looks right now, I can assure you that bull will be back. Some time in the middle of the next decade, maybe a little sooner, we will see the launch of a new secular bull.

Why? Because low valuations act just like a coiled spring. The tighter it gets wound, the more explosive the result. You just have to have patience."

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