The market lived up to history yesterday as it convincingly stumbled into September…which is typically a rough month in the stock market anyway.
This time, though, the plunge has more to do with the conviction that the market has raced ahead of the economic recovery…than pure calendar prophecy. Momentum based on speculation lasts only so long…and can’t make up for the lack of convincing evidence that the economic recovery is really here.
What the market needs at times like this are some points of certainty. One piece of speculation being talked about a lot that we can put to bed is that the dollar will not be replaced as the world currency any time in the near future.
Many world leaders are calling for the dollar to be replaced by a basket of world currencies…because what Wall Street caused in US financial markets had such a quick and colossal impact on economies around the world.
Despite the frustrations, though, and the fact that the dollar has lost some glitter, it won’t be removed from center stage:
· It would take an immense toll on many world economies that are closely tied to the dollar;
· It would devalue China’s immense dollar holdings; and
· It would raise US borrowing costs when the world cannot afford the implications.
Besides, it has been the currency of greatest political stability for 150 years. If you hold a note printed in 1934 or 1864, it’s still legal tender. That can’t be said even for the British pound. When in doubt, the world flocks to the dollar
The world will not pass the buck. The buck will stop here…and it will stay here as the world currency in the near future. No speculation!
Wednesday, September 2, 2009
Tuesday, September 1, 2009
“A Tale of Two Economies…” - September 1, 2009
The market yesterday and for the last several days is sending out a clear signal: it’s not convinced a recovery is here…In fact, it’s confused. And for good reason – we’re experiencing a Tale of Two Economies.
Consider the following:
· On the credit front, there is a gulf between those that can borrow and those that cannot. Big banks and big companies have easy access to credit. Small companies are finding it difficult to borrow…and face stiff terms to do so.
· On Main Street, there are those consumers with rock–solid jobs, but also an army of debt-strapped families struggling to make ends meet.
· Manufacturing is now growing…but more workers are still losing their jobs.
· Some consumers are buying…but only with incentives…like cash for clunkers, dollars for dishwashers or first-time homebuyer tax credits.
· The stock market rally of the past four months has been based on corporate cost cutting, not new revenue.
· The unemployment rate is still in the 9 ½% range – but the number of unemployed and underemployed is almost double, and many have already run out of benefits.
If there is about to be a party thrown to celebrate the end of the current economic crisis, someone forgot to invite two guests – U.S. workers and consumers. If a recovery is not balanced, it’s not sustainable.
Granted, at turning points, economic data can be mixed…but not muddled. If it’s confusing, it’s not convincing. And if it’s not convincing, then there is no confusion – there’s no broad-based recovery in sight. Convinced?
Consider the following:
· On the credit front, there is a gulf between those that can borrow and those that cannot. Big banks and big companies have easy access to credit. Small companies are finding it difficult to borrow…and face stiff terms to do so.
· On Main Street, there are those consumers with rock–solid jobs, but also an army of debt-strapped families struggling to make ends meet.
· Manufacturing is now growing…but more workers are still losing their jobs.
· Some consumers are buying…but only with incentives…like cash for clunkers, dollars for dishwashers or first-time homebuyer tax credits.
· The stock market rally of the past four months has been based on corporate cost cutting, not new revenue.
· The unemployment rate is still in the 9 ½% range – but the number of unemployed and underemployed is almost double, and many have already run out of benefits.
If there is about to be a party thrown to celebrate the end of the current economic crisis, someone forgot to invite two guests – U.S. workers and consumers. If a recovery is not balanced, it’s not sustainable.
Granted, at turning points, economic data can be mixed…but not muddled. If it’s confusing, it’s not convincing. And if it’s not convincing, then there is no confusion – there’s no broad-based recovery in sight. Convinced?
Monday, August 31, 2009
“The Looming National Debt…Only One Solution” - August 31,2009
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.
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.
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.
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