Roubini bullish on everything! Psych!
4 October 2009 by Christopher Suleske
NOURIEL Roubini states the (I think) obvious:
“Markets have gone up too much, too soon, too fast,” Roubini said in an interview in Istanbul on Oct. 3. “I see the risk of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U- shaped. That might be in the fourth quarter or the first quarter of next year.”
Recovery… from… what?
2 October 2009 by Christopher Suleske
HOW can there be a recovery from something when the underlying conditions of that something have not been fundamentally altered? I read a lot on the subject of the condition of the U.S. economy, but seldom from sources populated with talking heads, since they are usually parroting one another and are, in effect, parroting whatever they are intended to parrot. It is with bitter delight I read that some of the more commonly quoted sources are now reporting things I’ve been reading for a while. Here is Bloomberg today:
Oct. 2 (Bloomberg) — The number of U.S. lenders that can’t collect on at least 20 percent of their loans hit an 18-year high, signaling that more bank failures and losses could slow an economic recovery.
U.S. to experience economic collapse similar to Argentina?
9 September 2009 by Christopher Suleske
Economists Charles Rowley of George Mason University (my alma mater) and Nathanael Smith of the Locke Institute have written a piece entitled “Adam Smith would not be optimistic in today’s economic world“. Edmund Conway summarizes it thusly:
Although the authors support the Federal Reserve’s moves to slash interest rates to just above zero and embark on quantitative easing, pumping cash directly into the system, they warn that greater intervention could set the US back further. Rowley says: “It is also not impossible that the US will experience the kind of economic collapse from first to Third World status experienced by Argentina under the national-socialist governance of Juan Peron.”
The paper, which recommends that the US return to a more laissez-faire economic system rather than intervening further in activity, has been endorsed by Nobel laureate James Buchanan, who said: “We have learned some things from comparable experiences of the 1930s’ Great Depression, perhaps enough to reduce the severity of the current contraction. But we have made no progress toward putting limits on political leaders, who act out their natural proclivities without any basic understanding of what makes capitalism work.”
“You get rich by saving and investing”
9 September 2009 by Christopher Suleske
WRITES the sane (what passes for sage these days) Bill Bonner:
Two generations of American economists thought the way to bring prosperity was to encourage consumption. On the face of it, the idea is absurd. Classical economists…and Daily Reckoning commentators…laugh at the idea. You don’t really get rich by consuming; you get rich by saving and investing.
Bonner suggests that the underlying force for the problems we face today is our ceding of personal economics to vaunted elites, whom we believe know better than what common sense intones:
But they had their charts and graphs…their theories and their jobs teaching economics at prestigious universities. Naturally, they had the feds’ ears too – since every politician wants to promise more consumption. The feds favored home ownership, for example…even by people who were bad credit risks. They set up Fannie and Freddie to make it easy for people to buy houses. They even passed a law requiring banks to lend to people who weren’t likely to pay them back; that was the origin of the sub-prime mortgage market! They kept interest rates low, too, so people could borrow at affordable rates. And they inflated the currency, so consumers would want to spend their money rather than save it. They also opened the world to free trade, so Americans could buy more, cheaper stuff made by foreigners. For 50 years, they cultivated consumption and let production go to seed.
And now…wouldn’t you know it…Americans have over-consumed. Personal expenditures per capital rose 25% between 2003-2005. Personal debt soared to over $13 trillion…about $124,000 per household. Total debt/GDP tripled since 1980.
And now, it’s payback time. The private sector has cut back. Consumers need to under-consume to make up for the over-consumption of the bubble years. Savings rates are rising. Spending is falling (see below)…
And so what do the simpletons do? Private citizens are unwilling to consume…so they push the government to consume their money for them!
I was caught up in the hoopla to some extent, making use of the pseudo-equity in our home to consume much as we renovated our home, had a nice honeymoon, and generally threw caution to wind insofar as our budget. I basically did not have a budget from ~2004 – 2008. I largely did not require one earlier, as a single and childless man of means. Now it is a necessity if we are to survive, particularly with inflation looming.
Rather than popping our personal balloon, we are slowly deflating it: spending less than we produce and repaying our debts via the “snowball method“. See the link for more information on that.
Here we go again
9 September 2009 by Christopher Suleske
APPARENTLY not having learned a lesson, and searching for a new income stream, Wall Street is crafting yet another class of derivatives, this one particularly morbid. Writes Ian Mathias:
Since it worked so well the first time around, Wall Street has spawned a new age of securitization — instead of mortgages, this time it’s life insurance policies. Before we spit on this one, here’s how it works:
- A senior with a high-premium life insurance policy, for one reason or another, choses to cash out
Instead of taking a “cash surrender” directly from the insurance company, the old fella sells his policy to a “life settlement company”- That company pays him a larger amount than the “cash surrender” would pay, but not nearly the totality of the policy’s value.
- The company keeps paying the premiums. When he kicks the bucket, the company collects the insurance policy.
That’s where the story would normally be over. But now, just like pools of subprime, Alt-A and prime mortgages, investment bankers are crafting securitized pools of these insurance polices. Basically, they pool together a bunch of beneficiaries that will likely die around the same time, buy up their policies from life settlement companies, package them into securities and sell them to investors around the world.
The way this would be set up, there is motive for policy holders to die earlier! This would seem to nastily coincide with the “death panels” mentioned in the debate re: health care reform. Geesh.
I would suspect this will work like the securitized subprime mortgages did: initial high profits, followed by a bubble and a collapse. If you can sleep at night, i.e. the ethical issues do not bother you, there should be profits to be made early. Only early.
Public finances put into personal terms
2 September 2009 by Christopher Suleske
These findings underscore the importance of beginning the learning process as early as possible. Indeed, in many respects, improving basic financial education at the elementary and secondary school level is essential to providing a foundation for financial literacy that can help prevent younger people from making poor financial decisions that can take years to overcome. In particular, it has been my experience that competency in mathematics–both in numerical manipulation and in understanding its conceptual foundations–enhances a person’s ability to handle the more ambiguous and qualitative relationships that dominate our day-to-day financial decisionmaking. For example, through an understanding of compounding interest, one can appreciate the cumulative benefit of routine saving. Similarly, learning how to conduct research in a library or on the Internet helps one find information to evaluate decisions. Focusing on improving fundamental mathematic and problem-solving skills can develop knowledgeable consumers who can take full advantage of the sophisticated financial services offered in an ever-changing marketplace.
Testimony of Chairman Alan Greenspan – Financial literacy
Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate
February 5, 2002
Financial literacy among Americans today is no better than in 2002, and one could argue far worse. There are undoubtedly multiple reasons for this, but Greenspan’s assertion that education is lacking is quite reasonable. I will ask my wife, an elementary school teacher of 10 years, to address this specific issue at a later date. 
I have long thought that what is needed in the public discourse concerning the nation’s finances is someone of prominence to effectively communicate the nation’s finances in terms of personal finances. That is, relate very personally the way the governments handle our wealth.
Finance geeks such as Greenspan, though respected, are not effective communicators at the popular level. They are seen as almost other-worldly in today’s predominant culture. They are expected to advise our representatives, politicians, who are in turn expected to serve us as a bridge of sorts. At least, those are my expectations – perhaps out of line with reality.
The current slate of political types are especially ill-equipped to perform this function for two reasons:
- They are self-interested in perpetuating (and expanding) the methods of the status quo.
- They are in many ways ignorant of basic economic principals due to a number of reasons, including immense personal wealth and a belief that somehow governments operate apart from such economic fundamentals.
It’s this last point that is most salient, for in the case of politicians and the public, it is the blind leading the blind.
There are some exceptions to the assertion that politicians are unwilling or unable to communicate financial matters in personal terms. Ron Paul & Paul Ryan come to mind. There was Ross Perot, the erstwhile Presidential candidate. But none of these seems to have the platform or mastery of communication to present the material in a way the average American can understand. Of those with the platform and the ability to effectively communicate, I’m thinking Barack Obama and Ronald Reagan. Obama is among the aforementioned group which does not wish to educate the populace so as to equate public and private finances, as it would undermine his agenda. Reagan, well, he is unavailable.
Here’s the way I see it. First the figures:
- U.S. GDP = $14,035,087,719,298.20
- U.S. Median Annual Household Income (2007) = $50,233.00
- U.S. Total Public Debt (2009) = $8,000,000,000,000 (57% of GDP)
- Projected U.S. Total Public Debt (2019) = $17,300,000,000,000 (82% of GDP)
- Projected U.S. Median Annual Household Income (2019) = $61,233.75 (2% annual increase)
- Projected U.S. GDP (2019) = $21,097,560,975,609.80
- U.S. Federal Budget Deficit (2008) = $459,000,000,000
- U.S. Federal Budget Deficit (2009) = $1,850,000,000,000
- U.S. Federal Budget (2008) = $2,979,000,000,000
- U.S. Federal Budget (2009) =
So, in personal terms
Consumer spending habits “forever” changed?
14 August 2009 by Christopher Suleske
Kristin BENTZ (by way of Peter GORENSTEIN) argues that the recent contraction of consumer spending is a permanent phenomenon:
Someone who wasn’t surprised by the weak data is former Wall Street retail analyst Kristin Bentz. “It’s going to take this consumer a long time to recover,” she says. The author of the retail focused investing blog, The Talented Blonde, believes the recession has changed the consumer’s behavior forever. “I think that Americans are willing to do with less and aren’t going to be so easily seduced by retail.”
To be sure, consumer spending is way down – which is a serious issue for this economy, largely driven by consumer spending – but to argue this is permanent? It reminds me of the talk in the late 90s of the permanent end of the business cycle. That argument went extinct in 2000-01.
What lies beneath
1 July 2009 by Christopher Suleske
Gary DeMar at the American Vision blog has a good primer piece on the Judeo-Christian foundation behind free-market economics (and one can argue the secular-humanist crumbly foundation beneath socialism). Salient nugget concerning Americans of today:
The average American has only vague notions of these ideas. While most Americans would agree that stealing is wrong, they don’t seem to have a problem if some other entity steals for them. Consider this series of examples. If John has a financial need, would it be right for him to rob his neighbors to supply that need? Most people would say no. Would it be right for John to get some of his friends to steal for him? Again, most people would say no. What if John convinces enough people to create a civil government that takes money from his neighbors to pay for things John and others need? Now the picture changes, and I suspect that a lot of people would not call it theft because they are getting a benefit.
The free market is counter intuitive for many people, especially politicians, many of whom have never owned a business. Passing laws for society and exempting themselves is standard fare in Washington. When Social Security was made law, Congress exempted itself and other government employees by developing their own private retirement programs. This changed in 1983 for new government employees.
Excellent unadvertised counsel (the ideal sort)
1 July 2009 by Christopher Suleske
I am still processing this read. It’s an interview with Ray Dalio, a well-respected Chief Investment Officer with an excellent track record. More importantly, he pulled out nearly 10% gains last year because he’s been on the watchful end of our economic situation. He appears to know what he’s talking about and his arguments make much sense. While I don’t want to think this truly the case – that we are in the midst of a depression / deflation, I find it hard to argue with his assertions.
The D-process is a disease of sorts that is going to run its course.
When I first started seeing the D-process and describing it, it was before it actually started to play out this way. But now you can ask yourself, OK, when was the last time bank stocks went down so much? When was the last time the balance sheet of the Federal Reserve, or any central bank, exploded like it has? When was the last time interest rates went to zero, essentially, making monetary policy as we know it ineffective? When was the last time we had deflation?
The answers to those questions all point to times other than the U.S. post-World War II experience. This was the dynamic that occurred in Japan in the ’90s, that occurred in Latin America in the ’80s, and that occurred in the Great Depression in the ’30s.
Basically what happens is that after a period of time, economies go through a long-term debt cycle — a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren’t adequate to service the debt. The incomes aren’t adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.
He goes on to make some vague recommendations for investments over the next 2 years. Well worth your read, I believe.
What I wonder if he is taking into account is the ultra-heavy hand of government this time around. It simply isn’t as it used to be. At least in prior events, we had a largely free market capitalist paradigm in place. The economy would, at first and second glances, seem to be quite different today.
THE Chinese threat
29 June 2009 by Christopher Suleske
MUCH has been bandied about insofar as the threat China poses to the U.S. economy. Usually it is commentary related to their massive trade surplus. That is the least of our worries. Here is the most immediate concern:
China’s banks are veering out of control. The half-reformed economy of the People’s Republic cannot absorb the $1,000bn (£600bn) blitz of new lending issued since December.
Money is leaking instead into Shanghai’s stock casino, or being used to keep bankrupt builders on life support. It is doing very little to help lift the world economy out of slump.
…
Bank exposure to corporate debt has reached $4,200bn. It is rising at a 30pc rate, even as profits contract at a 35pc rate.
Fitch traces the 2009 bubble to the central bank’s decision to cut interest on reserves to 0.72pc. Bankers responded to this “margin squeeze” by ramping up the volume of lending instead. Over half the new debt is short-term. Roll-over risk is rocketing. China’s monetary stimulus since November is arguably more extreme than the post-Lehman printing of the US Federal Reserve, though less obvious to the untrained eye.
…
Unfortunately, 40pc of the “real economy” consists of exports, mostly to the US and Europe, the consequence of a (sic) mercantile export model that has (sic) crashed and burned. Chinese exports were down 26pc in May.
…
Protectionism is a risky game for a country that lives off global trade and runs a surplus near 10pc of GDP. Mr Pettis said he fears China is nearing its “Smoot-Hawley moment”, repeating the US tariff blunder of 1930 that brought the world crashing down on Washington’s head.
