This week is the last full week before the Labor Day holiday, and it should be relatively quiet in the stock markets…because it will be quiet on the data front – nothing likely to shake up the markets is due out this week.
But there is one looming topic that the markets are very concerned about and will be watching both Fed Chairman Bernanke as well as Congress to see how they intend on dealing with it…It’s the national debt.
The concern is big…because the arithmetic is shocking…as well as simple:
Last year the Federal Government spent over $450 billion on interest payments to holders of the National Debt…the 3rd largest expense item in the Federal budget. Compare that to $15 billion for NASA, $61 billion for Education, and $56 for the Department of Transportation.
· The last time the U.S. effectively had no debt was in the 1830s;
· It took 150 years for the national debt to reach $1 trillion …in 1981;
· And only one decade to triple it…to over $3 trillion in 1990;
· And it is now quadruple that…or $13 trillion this year….almost the same size as the overall economy.
· It will grow by over $1 trillion every year for the next decade.
How do you pay off this huge bill? New taxes? There are not enough people even at all income levels. There are only two ways to get rid of big debt…you earn more money to pay it off…or you default. This fall the markets will be watching Bernanke and Congress for some creative answers…not to spread the wealth…but to boost it.
Monday, August 31, 2009
Thursday, August 27, 2009
“Signals and Noise in the Economy” - August 27,2009
Lots of chatter on the Street that the deep slide in the economy is about to bottom out. On the surface, the latest data would certainly support the notion:
· The stock market has been up for seven straight days to its highest level since last November.
· Stability in the housing market seems to be returning. The latest new home sales were up almost 10% in July, far beyond expectations, to their highest levels since last September. Earlier in the month, existing home sales were also strong.
· Consumer confidence as measured by the Conference Board rose in August.
· Durable goods orders – goods meant to last 3 years or longer – were also higher than expected.
But you have to dig deeper. Today’s GDP data and some other factors would suggest otherwise.
· Stock market volume has been very thin lately…40% of all trading yesterday was dominated by 4 stocks – Citigroup, Fannie Mae, Freddie Mac, and Bank of America…all recipients of a big chunk of Federal bailout money. This is scary…It suggests the market is being fueled by speculation not fundamental strength.
· The housing market is being helped by low mortgage rates, huge price reductions, and first-time homebuyer tax credits…not boosts in income.
· And consumers aren’t buying anything except essentials…or what is government subsidized.
Our emotions are getting ahead of ourselves. A sustainable recovery is not around the corner.
Wednesday, August 26, 2009
“Ben Bernanke…Chairman and Steward” - August 26, 2009
The reappointment of Ben Bernanke to a second term as Chairman of the Federal Reserve couldn’t have come at a better time. Late August in the stock market is not always the most exciting place to be even in normal times.
His reappointment will have a calming effect on the market…at least for a while. Fed policy will be a lot more predictable than would have been the case if the President had changed horses.
It was also the right decision. The guy has done an excellent job of guiding the economy back from the brink of disaster…in creative and unprecedented ways.
· He is a student of the first Depression. He knew the mistakes that were made 75 years ago and what needed to be done…and he aggressively did it.
· In his second term, he will be confronting a crisis that extends far beyond the banking system and monetary policy…and into ethics and risk-management standards of our major financial companies. That’s euphemistic for more regulations!
Bold and out-of-the-box thinking got him his reappointment. Bold and out-of the-box thinking will be required to deal with the enormous problems we still face.
If he succeeds, he will become one of the most influential Federal Reserve Chairmen in history. More importantly, he will help to improve economic conditions for a long time.
His reappointment will have a calming effect on the market…at least for a while. Fed policy will be a lot more predictable than would have been the case if the President had changed horses.
It was also the right decision. The guy has done an excellent job of guiding the economy back from the brink of disaster…in creative and unprecedented ways.
· He is a student of the first Depression. He knew the mistakes that were made 75 years ago and what needed to be done…and he aggressively did it.
· In his second term, he will be confronting a crisis that extends far beyond the banking system and monetary policy…and into ethics and risk-management standards of our major financial companies. That’s euphemistic for more regulations!
Bold and out-of-the-box thinking got him his reappointment. Bold and out-of the-box thinking will be required to deal with the enormous problems we still face.
If he succeeds, he will become one of the most influential Federal Reserve Chairmen in history. More importantly, he will help to improve economic conditions for a long time.
Tuesday, August 25, 2009
“Consumer Concern…not Confidence” - August 25, 2009
Two important news items today. The first is the Conference Board’s consumer confidence index. The drop in this index in July was the biggest since the aftermath of Hurricane Katrina in 2005. Today’s data for August will reflect a continued nervous consumer.
The reasons are simple: despite wishes, there’s not a lot to be confident about. There’s a lot of talk about things getting better, but not many facts. Consumers are most worried about the jobs picture, just as they were last month. And since the marginal improvement in the unemployment rate in July was a technical fluke, moods won’t be much better.
By the way, the reason that these consumer confidence surveys are so important – and why the market pays so much attention to them – is that for over 40 years, they have been amazingly accurate about key economic numbers and conditions in the near future.
The second and more upbeat piece of news today is that Fed Chairman Ben Bernanke will be reappointed. This is not just good news; it’s great news. Continuity in leadership always helps when leadership has been outstanding – particularly so in financial markets. And Bernanke’s leadership has been nothing short of excellent. His bold actions prevented an outright collapse in the US financial system, as well as providing stability to financial markets worldwide.
Let’s see if the net effect of the Bernanke factor can outweigh nervous and grumpy consumers…I wish…but I don’t think so.
The reasons are simple: despite wishes, there’s not a lot to be confident about. There’s a lot of talk about things getting better, but not many facts. Consumers are most worried about the jobs picture, just as they were last month. And since the marginal improvement in the unemployment rate in July was a technical fluke, moods won’t be much better.
By the way, the reason that these consumer confidence surveys are so important – and why the market pays so much attention to them – is that for over 40 years, they have been amazingly accurate about key economic numbers and conditions in the near future.
The second and more upbeat piece of news today is that Fed Chairman Ben Bernanke will be reappointed. This is not just good news; it’s great news. Continuity in leadership always helps when leadership has been outstanding – particularly so in financial markets. And Bernanke’s leadership has been nothing short of excellent. His bold actions prevented an outright collapse in the US financial system, as well as providing stability to financial markets worldwide.
Let’s see if the net effect of the Bernanke factor can outweigh nervous and grumpy consumers…I wish…but I don’t think so.
Monday, August 24, 2009
“Weapons of Mass Financial Destruction…” - August 24,2009
Old habits die hard…and sometimes they don’t die at all…particularly on Wall Street.
The same type of securitization products – that’s the pooling and repackaging of loans into securities – that helped to bring the global financial system to its knees in the past year are now surfacing again…and fast. Here we are with the big banks feeling better and getting back on their feet, and little has changed.
Bank of America, Citigroup, and JP Morgan Chase, for example, are peddling dressed-up versions of the same dicey products. They’ve recently rolled out new corporate credit lines tied to complicated and volatile credit default swaps – which reached $62 trillion in 2008, five times the size of the entire economy.
Warren Buffet called these instruments “weapons of mass financial destruction.” And he’s right.
As with all tools, the problem isn’t the tool, it’s whose hands it’s in. In the hands of lenders looking for some insurance for questionable loans, they’re helpful. In the hands of traders who just want to make money by speculating about whether a company will fail, they’re Wall Street’s version of nitroglycerine.
Credit default swaps need to be rigidly regulated… put on an exchange, not left in the hands of just a few big banks. The domino failure of these trillions of dollars of instruments again would send a sonic boom through the economy. The sustainability of any recovery would then not be the question…It would be the survivability of the system.
The same type of securitization products – that’s the pooling and repackaging of loans into securities – that helped to bring the global financial system to its knees in the past year are now surfacing again…and fast. Here we are with the big banks feeling better and getting back on their feet, and little has changed.
Bank of America, Citigroup, and JP Morgan Chase, for example, are peddling dressed-up versions of the same dicey products. They’ve recently rolled out new corporate credit lines tied to complicated and volatile credit default swaps – which reached $62 trillion in 2008, five times the size of the entire economy.
Warren Buffet called these instruments “weapons of mass financial destruction.” And he’s right.
As with all tools, the problem isn’t the tool, it’s whose hands it’s in. In the hands of lenders looking for some insurance for questionable loans, they’re helpful. In the hands of traders who just want to make money by speculating about whether a company will fail, they’re Wall Street’s version of nitroglycerine.
Credit default swaps need to be rigidly regulated… put on an exchange, not left in the hands of just a few big banks. The domino failure of these trillions of dollars of instruments again would send a sonic boom through the economy. The sustainability of any recovery would then not be the question…It would be the survivability of the system.
Sunday, August 23, 2009
“Bernanke…to Speak or to Spin?” - August 21, 2009
The two big questions the worldwide markets are asking right now are:
(1) “Is the U.S. recovery around the corner?” and (2) “Is it sustainable?”
My answers are “No!” and “No!”
Fed Chairman Ben Bernanke is speaking today at the Kansas City Fed’s annual conference in Jackson Hole, Wyoming. And everybody will be listening to see how he answers these questions.
I don’t see the evidence for an imminent and sustainable recovery. Here are some telling facts:
· In the stock market, insider selling has increased, suggesting that valuations are overstated;
· Short positions are also down, eliminating a source of market support we’ve had during the past 4-month run-up;
· Consumer sentiment was down in August as consumers assessed their own situations and concluded “No recovery in my house;”
· Unemployment is still rising;
· Home values continue to fall;
· The consumer is becoming a saver, more interested in building their own acorn pile than spending;
· And on the banking front, the “alt–A” mortgages – known as the “liar loans” – will reset in 2010 and 11…and they’re bigger than the sub prime volume.
I guess that’s enough!
It will be interesting to see if the Fed Chairman can spin these facts into a “Yes!” and a “Yes!”
“Recovery?...or Eye of the Storm” - August 20, 2009
The markets are still jittery due to uncertainty on many fronts. And today’s jobs claims won’t do a lot to help.
We’ve been going through an economic hurricane since last summer. Although the stock market was up 50% since March and many indicators from unemployment to GDP showed signs of improvement in recent months, reported sightings of a recovery coming this year were absurdly premature.
The truth is that the indicators cited were not good…they were simply less bad than previous numbers. And less bad doesn’t equal good.
· The number of people receiving unemployment compensation tops 9 million, and 1.5 million of those are at risk of running out of their benefits.
· 1/3 of those unemployed have been out of work for 6 months or more.
· By the end of this year, nearly 40% of the workforce will have been unemployed at some point in the last 18 months.
· The number of people involuntarily working part time is at an all-time high…and those people will be hired back first before new jobs are created.
Jobs will materialize when materials start disappearing off store shelves. And that won’t happen until consumers are convinced this storm has passed.
Like in the eye of a hurricane, there are glimmers of sunshine. But that’s all they are. People who get hurt in hurricanes are typically those who get hit by the backside of the eye wall…because they go outside not realizing the rest of the storm is still coming.
Right now, the data is very clear…we are in the eye of the storm.
We’ve been going through an economic hurricane since last summer. Although the stock market was up 50% since March and many indicators from unemployment to GDP showed signs of improvement in recent months, reported sightings of a recovery coming this year were absurdly premature.
The truth is that the indicators cited were not good…they were simply less bad than previous numbers. And less bad doesn’t equal good.
· The number of people receiving unemployment compensation tops 9 million, and 1.5 million of those are at risk of running out of their benefits.
· 1/3 of those unemployed have been out of work for 6 months or more.
· By the end of this year, nearly 40% of the workforce will have been unemployed at some point in the last 18 months.
· The number of people involuntarily working part time is at an all-time high…and those people will be hired back first before new jobs are created.
Jobs will materialize when materials start disappearing off store shelves. And that won’t happen until consumers are convinced this storm has passed.
Like in the eye of a hurricane, there are glimmers of sunshine. But that’s all they are. People who get hurt in hurricanes are typically those who get hit by the backside of the eye wall…because they go outside not realizing the rest of the storm is still coming.
Right now, the data is very clear…we are in the eye of the storm.
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