Tuesday, June 30, 2009

Is The Stock Market Rally a 'Validation'?

Is The Stock Market Rally a ‘Validation’?
Tuesday, June 30th, 2009

As seen in the Fortune story of June 15 titled "Economy in 'early stages of repair'":

“The stock market’s rally serves as “broad validation” of the Obama administration’s financial rescue efforts, Treasury Secretary Tim Geithner said Monday.”

While ostensibly this is correct, and commonly-held theory states that a stock market rally would precede an economic recovery, is this stock market rally a “validation” as stated? Or is a guarantee of any type?

In my opinion, one has to be careful about “reading too much” into stock market rallies, as they can prove to be ephemeral. One should also take into account a broad range of economic and financial “fundamentals” as well.

If this stock market rally proves to be a “bear market rally” (as I have previously stated on the June 8 post), it will fall below the previous S&P500 low of ~666. Would such price action ”validate” the “financial rescue” efforts?

SPX at 916.31 as this post is written

The Madoff Fraud - Are There More?

The Madoff Fraud – Are There More?
Monday, June 29th, 2009

Here is the latest update on the Madoff sentencing from CNBC:


A few months ago, I wrote an article titled “Crime During Economic Stress.”

One of the questions that I have is whether there are more frauds in existence that haven’t yet been uncovered? As I discussed in the article, the Madoff fraud really didn’t appear to be overly sophisticated, and there have been various other frauds uncovered over the last few months. Have all of the frauds been uncovered?

This question is especially important for a variety of reasons. Perhaps chief among these reasons are the following: unraveling frauds are the among the quickest way to lose money; and uncovered frauds are devastating in that they destroy confidence and raise many doubts.

SPX at 926.72 as this post is written

Is Ben Bernanke a "Hero"?

Is Ben Bernanke a “Hero”?
Monday, June 29th, 2009

Recently various people have given high marks and effusive praise for Ben Bernanke’s performance during the Financial Crisis. Here is a sampling:

“Bernanke’s Handling of US Crisis Gets Strong Mark” :


From Jack Welch:

“I think he saved the system, I think he’s a national hero,” Welch said. “I think Bernanke seems to be a guy operating on a clear intellectual framework. This guy’s done a hell of a good job.”


Attributed to Abby Joseph Cohen:

“She also said that history is likely to show that Fed Chairman Ben Bernanke has been an “extraordinarily effective” leader during the current crisis, the worst U.S. recession since World War Two.”


From Warren Buffett:

“The urgency has moved away from a total meltdown of the financial sector which we faced last fall. I’ve never seen anything like that. But I would give enormous credit to the people there. (Federal Reserve Chairman) Bernanke did a fabulous job.”


There are other examples as well. I could comment extensively regarding this praise and “high marks” for Bernanke, and might do so in the future.

However, for now perhaps the main question that comes to mind is whether by commenting in this fashion these people are presupposing that The Financial Crisis is over and that we are indelibly on the road to recovery?

SPX at 918.90 as this post is written

A Conflict of Interest?

A Conflict of Interest?
Monday, June 29th, 2009
I found this story in The Washington Post, from June 11, to be rather interesting:

“Lawmakers Invested in Bailed-Out Firms” :


I would have assumed there are rules that expressly prohibit such a conflict of interest. If not, perhaps a recusal would be appropriate?

SPX at 918.90 as this post is written

More Questions Regarding Green Shoots

More Questions Regarding Green Shoots
Sunday, June 28th, 2009

In the last post, Warren Buffett commented what he was seeing with regard to signs of an upturn. This link contains what John Rice, Vice Chairman of GE recently (6/19) said:

“I am not particularly of the green shoots group yet,” Rice said today to the Atlanta Press Club, referring to a phrase used by Federal Reserve Chairman Ben S. Bernanke that described signs of a nascent recovery. “I have not seen it in our order patterns yet. At the macro level, there may be statistics suggesting the economy is starting to turn. I am not seeing it yet.”


Between Warren Buffett and John Rice, there is a tremendous size and breadth of businesses overseen. Their comments seem to support the question as to whether “green shoots” exist, i.e. is the economy showing signs of recovery?

This question is absolutely critical at this juncture, for a variety of reasons. Perhaps chief among them is the following: If there currently is no economic recovery, how sustainable is the stock market (as well as other markets’) rally since early March? If there is no economic recovery, is that some type of proof of the ineffectiveness, or failure, of the intervention efforts? Are we heading toward Sustainable Prosperity?

SPX at 918.90 as this post is written

Warren Buffett June 24 Interview

Warren Buffett June 24 Interview
Thursday, June 25th, 2009

I found this Warren Buffett interview to be interesting, particularly when he says this:

BECKY: The last time we sat down to talk to you was on May 4, and at that point you told us that you think we’re in an economic war right now. How much progress do you think we’ve made in that war?

BUFFETT: Well, it’s been pretty flat. I get figures on 70-odd businesses, a lot of them daily. Everything that I see about the economy is that we’ve had no bounce. The financial system was really where the crisis was last September and October, and that’s been surmounted and that’s enormously important. But in terms of the economy coming back, it takes a while. There were a lot of excesses to be wrung out and that process is still underway and it looks to me like it will be underway for quite a while. In the (Berkshire Hathaway) annual report, I said the economy would be in a shambles this year and probably well beyond. I’m afraid that’s true.



As an aside, for those interested I wrote an article a few months ago titled “Does Warren Buffett’s Market Metric Still Apply?” It discusses several issues that may be of interest to followers of Buffett, as well as investors in general.

SPX at 920.26 as this post is written

Article of Note

Article of Note
Thursday, June 25th, 2009

I would like to call attention to an article written a few months ago by Scott S. Powell titled “‘The Road to Sefdom’ - Revisited.” Although I don’t entirely agree with all of its points, it presents several themes and points that I believe to be very important and worthy of serious contemplation.

Here is the link:


SPX at 906.45 as this post is written

The Untimely Death of Long-Held Assumptions

The Untimely Death of Long-Held Assumptions
Thursday, June 25th, 2009

Ever since the Economic Crisis began, there has been one facet that has been very under-recognized – that many long-held assumptions have proven incorrect.

There are many of these assumptions, but I will list a few. The “fallout” from these assumptions proving incorrect has been widespread and very damaging:
  1. Real estate (particularly residential) always goes up.
  2. Las Vegas / gambling is immune to recessions.
  3. A Fed Funds rate near zero would, in effect, “supercharge” the economy; i.e. lowering the rate would cause the economy to “boom”
  4. Gold would “rocket”, or at least perform very strongly during a financial crisis
  5. “Gentleman’s Clubs” are recession-proof (see link)http://online.wsj.com/article/SB124467942901904435.html
There are many others. It is important to realize that, although these assumptions may seem to have been rather faulty in hindsight, the reason they became such ingrained beliefs is that they had withstood “the test of time.” That they have now proven inaccurate, after such lengthy “tests of time” is, in my opinion, another testament that we are currently in an economic environment that is truly different than those that have come before – with the concomitant implications…

SPX at 907.66 as this post is written

A Quote of Note from Pete Peterson

A Quote of Note from Pete Peterson
Wednesday, June 24th, 2009

I found the following interview to be of interest. Pete Peterson certainly has an interesting background:


Of particular note was a quote from the article:

“We now have political system where, unlike what the founders of the country had in mind, politicians consider the position a career and don’t want to lose their jobs. If they peddle the hard truths, they fear they’ll lose elections and lose their jobs.”

SPX at 901.08 as this post is written

An Interesting New Index

An Interesting New Index
Wednesday, June 24th, 2009

I ran across the following – it is Fortune’s Big Picture Index. From the original notice in Fortune Magazine, June 8, p 62, “Our new proprietary index measures seven key signs of economic health”

I find the index interesting, and worth at least a quick peek. Unfortunately, the link provided doesn’t give a lot of detail with regard to index construction, history, backtesting, etc. – and seems to only go back to 2007. Nonetheless, it is nice to see the overall index trend and then the seven subcomponent trends, as well as an overall “meter” of the recession vs. recovery spectrum.

Here is the link:


SPX at 900.94 as this post is written

The Concept of a "Super Depression"

The Concept of a “Super Depression”
Tuesday, June 23rd, 2009

Please note; some will find this post disturbing

I would like to call your attention to the article titled “A S&P500 Target of 100?”

With the S&P500 currently at 893.72, I am sure that many will find the mere notion of the 100 level to be highly unlikely if not outlandish. However, I would point out that our current economic situation is exceedingly complex, and that any further economic weakness could play out in an unpredictable fashion.

As indicated in the article, if the S&P500 were to fall to the 100 level the accompanying economic situation would likely be dreadful and chaotic. It could very well represent the biggest challenge our nation has ever encountered.

Such a situation, if it were to occur, could be categorized as a “Super Depression,” which I would define as a severe Depression embedded with highly complex, difficult-to-solve problems.

In future posts, I will likely further comment on the prospects of a Depression and/or ”Super Depression.” From my perspective, on an “all things considered” basis, both are (most unfortunately) possibilities.


For those who haven’t yet read this site’s disclaimer, please see the “Special Note”

SPX at 893.31 as this post is written

How Can We Go Into A Depression?

How Can We Go Into a Depression?
Tuesday, June 23rd, 2009

As previously indicated, in this June 19 post, most mainstream economic forecasters as well as many other financial professionals believe that “the worst is behind us” as far as economic damage. It certainly would be nice if this were the case.

However, for a variety of reasons, I continue to believe that while it is possible that “the worst is behind us” there is more likely to be more damage ahead. There is an array of serious problems, as well as various indicators that indicate potentially severe economic weakness ahead. Any further economic weakness could certainly push the economy from a “severe recession” into a Depression.

The way I view it, there are a range of various scenarios that can play out from here. On the one end of the spectrum is the above-referenced mainstream economist consensus, one of gradual improvement. On the other end of the spectrum is that of continued economic weakness that has the potential to build upon itself.

A question arises as to how continued economic weakness could happen, both from a fundamental basis, as well as a quantifiable one. The situation is highly complex and there are many drivers. Continued economic weakness, assuming it will happen, would likely “play out” in a very unpredictable fashion.

As a reference to our current situation, I would point out the writings in the “Investor” section, which provide some quantifiable aspects. The writings in the “Articles” section will provide some other background as well. They can be found in the "Directory Of Articles."

SPX at 897.33 as this post is written

Are We Avoiding a Depression?

Are We Avoiding a Depression?

Monday, June 22nd, 2009

Perhaps the most common refrain heard with regard to our current economic situation, and why it won’t become a Depression, is that we as a nation have been proactive and aggressive in “managing” this period of economic weakness.

This theory, more or less, has the following generalized (and summarized) structure:
  1. There has been rigorous research conducted on the causes of The Great Depression.
  2. Ben Bernanke is widely proclaimed as an expert on The Great Depression era.
  3. Through the knowledge derived through the extensive research of The Great Depression, as well as Ben Bernanke’s expertise of the era, we (as a nation) have a thorough understanding of the causes of The Great Depression, and how that period could have been better managed, if not avoided either fully or in part.
  4. During our current period of economic weakness, widely called “The Economic Crisis” (or “Financial Crisis”), we (as a nation) have been very proactive in deploying various intervention measures that would have avoided The Great Depression and therefore will act to help us avoid a Depression.
I question a variety of the assumptions above. Additionally, and perhaps most importantly, is our current economic predicament analogous to that of The Great Depression? While there are certain similarities, there appear to be notable differences as well. Plus, just the time differential alone would appear to make comparisons difficult.

If the two periods are fundamentally different, why are people apt to compare them? While this is difficult to answer, it may be (at least in part) because Americans have few periods of severe economic weakness to reference, especially over the last 100 years or so. If this is correct, it may also call into question the appropriateness of comparisons between this period and The Great Depression.

With regard to whether we, as a nation, have a thorough knowledge of The Great Depression, has been questioned by some. If our current period of economic weakness is not comparable to that of The Great Depression, it becomes more of an ”academic question” as “lessons learned” from The Great Depression would not necessarily be applicable to the situation we now face.

Furthermore, if our current period of economic weakness is not comparable to that of The Great Depression, the main concern becomes whether our intervention efforts, that purportedly would have avoided The Great Depression, will help us avoid going into our own Depression.

As one can see from the above, I think there are considerable questions that can, and should, be raised with regard to the widely held aforementioned theory and generalized structure presented.

SPX at 904.99 as this post is written

Are We In A Depression?

Are We In a Depression?
Monday, June 22nd, 2009

One of the questions that seems to be popular since the economic events of 2008 is whether we are in a Depression. As such, for the next few posts I will be commenting on the topic.

Here are two links that indicate that we are not in a Depression:



Yet, as indicated in this following link, the rate of decline in various measures seems to indicate that our experience to date at least matches, if not exceeds, that of The Great Depression.


So, as seen above, there seems to be contrasting measures regarding our current economic weakness. At this point, most in the mainstream use the term “severe recession” to classify our current economic predicament.

In my opinion, on an “all things considered” basis, I think the “severe recession” classification is apt, but one could also strongly argue for using a “mild Depression” tag at this point in time. The Unemployment Rate and GDP decline seem to be cited as the predominant statistics in determining whether a Depression exists. While it is true that both of these measures are not near those that would indicate a Depression, there are an array of other measures that have undergone severe declines and currently stand at (or near) multi-decade lows. As well, it just seems like there is an extraordinary level of stress evident from a fundamental perspective that is far out of the ordinary even for “tough times.”

Regardless of the economic classification used, I think the more important issue is the characteristics of the economy; the underlying problems and how easily they can be solved; and the economy’s future trend – either recovery or further decline. Of course, whether we are on a path to Sustainable Prosperity, as well as associated issues, should be considered.

SPX at 921.23 as this post is written

The Global Economic Future

The Global Economic Future
Sunday, June 21st, 2009

One of the questions I received when I first started this blog is why I didn’t choose to discuss the global economic future, as opposed to America’s Economic Future.

This is a good question. In essence, I do believe its focus is on the global economic future, as not only is the United States (obviously) the largest economy, but its economy and its characteristics are so pivotal to those of the rest of the world. Perhaps as importantly, the United States seems to have attained global leadership with regard to how to best ”manage” an economy, as well as how to “fix” The Economic Crisis. It is evident that many global economies, especially the more developed ones, have adopted (to varying degrees) the same philosophies and actions that the United States has as far as overcoming The Economic Crisis.

As such, I believe an economic discussion that focuses on the United States can in many ways be extended to other countries as well. The main issues of this blog, such as Sustainable Prosperity, Economic Greenfield vs. Economic Brownfield, etc. are certainly pertinent and applicable to countries and regions worldwide.

SPX at 921.23 as this post is written

Moral Hazard Wonderland

Moral Hazard Wonderland
Sunday, June 21st, 2009

To date, I haven’t written or otherwise commented about the issue of Moral Hazard.

Perhaps the main reason is that I am afraid if I start writing about it, I may never stop…

Needless to say, the issue of Moral Hazard and its implications are massive, and just seems to grow with time. It seems as if the issue has taken a “back seat” for quite a while now, and, paradoxically, seems to have become even less of an issue, policy-wise, since The Financial / Economic Crisis began.

The following is an interview with FDIC Chair Sheila Bair which discusses the Moral Hazard topic and related issues:


SPX at 921.23 as this post is written

Current Economic Forecasts

Current Economic Forecasts
Friday, June 19th, 2009

It seems as if there appears to be a growing consensus among private and public sector economists regarding economic forecasts; that of slightly positive third-quarter GDP growth, which gradually improves going forward; as well as a peak in unemployment around 10%.

This is reflected in the latest (June) Wall Street Journal Economic Forecasting survey :


In the survey, the average 3Q 2009 GDP growth rate is seen at .6%, followed by 1.9% in Q4, and then 2.3% in 1Q 2010 and 2.8% in 2Q2010. Unemployment is seen at 9.9% in December 2009 and gradually declines to 9.4% in December 2010.

Again, this survey of 54 economists seems to generally match the consensus among other public (Federal Reserve and other government agency) and private sources.

I will use this post as a reference going forward. It seems to confirm that economists in general see that “the worst is behind us” for the most part and that mild economic growth (i.e. a recovery) awaits in coming quarters.

SPX at 924.54 as this post is written

Managing Economic Uncertainty

Managing Economic Uncertainty
Friday, June 19th, 2009

A couple of days ago I posted excerpts of a speech by Ben Bernanke in which he outlines various reasons for inherent uncertainty and difficulty in economic predictions and forecasts.

It appears that ever since the start of The Financial Crisis, in early 2007, it has been very difficult for forecasters to accurately predict economic performance. For those interested, I have compiled numerous examples of this, which can be found under the “Predictions” title in the "Directory Of Articles."

In light of this inherent uncertainty (and what some may call inability) of economic forecasting, and by extension efforts to “manage” the economy, how can this uncertainty be best managed given that the country has embarked on such a large, and expansive, intervention (including bailouts, guaranteed loans, stimulus plans, etc.) effort?

Months ago I put together a framework on how to best manage the risks and uncertainties inherent in the various intervention measures. Just like businesses can successfully manage business plan risk, our country can, and should, seek to manage risks inherent in the various intervention measures.

The article is entitled “Business Planning Principles Applied to the Stimulus / Intervention Efforts” and can be found under the “Directory Of Articles” heading.

Please note this is not necessarily an endorsement of these intervention efforts; it is suggestions as to how best manage the efforts as the stimulus/interventions are put into effect.

SPX at 926.51 as this post is written

Businesses and Economic Stress

Businesses and Economic Stress
Thursday, June 18th, 2009

My analyses indicate that, unfortunately, businesses will continue to face very challenging conditions.

Many already find themselves in rather perilous circumstances, as witnessed by the number and breadth (across industries) of companies experiencing double-digit revenue declines, not to mention innumerable other statistics.

On a couple of occasions I have written about the conditions that businesses face during this period of economic stress, with some ideas as to how they might better manage and adapt. Those works can be found in the Directory Of Articles.

SPX at 919.64 as this post is written

Consumer-Led Recovery Story

Consumer-Led Recovery Story
Thursday, June 18th, 2009

This story, “On Borrowed Time : Consumer-Led Recovery” was in The Wall Street Journal on June 9. I found the chart and its implications to be interesting. One is led to wonder “how much gas is left in the tank” with regard to Household Debt as a Percentage of Disposable Income. This is especially an issue with ”Income” and asset values under pressure.

Also, there are various implications concerning Sustainable Prosperity…


SPX at 911.96 as this post is written

Green Shoots

Green Shoots
Wednesday, June 17th, 2009

I find it interesting that the term “Green Shoots” seems to have been eradicated in any official government comments regarding the economy. I am not sure why this is so, as the term itself seems rather innocuous.

There must be a reason for its demise, however…

SPX at 907.07 as this post is written

Ben Bernanke - Notable Speech Passages

Ben Bernanke – Notable Speech Passages

Wednesday, June 17th, 2009
For those who didn’t read Ben Bernanke’s Commencement Address to The Boston College School of Law on May 22, I would like to highlight a few passages. I found the passages below informative and telling; I will let them speak for themselves, and might refer back to them in future posts.

The entire speech can be found here:



“Instead, I’d like to offer a few thoughts today about the inherent unpredictability of our individual lives and how one might go about dealing with that reality. As an economist and policymaker, I have plenty of experience in trying to foretell the future, because policy decisions inevitably involve projections of how alternative policy choices will influence the future course of the economy. The Federal Reserve, therefore, devotes substantial resources to economic forecasting. Likewise, individual investors and businesses have strong financial incentives to try to anticipate how the economy will evolve. With so much at stake, you will not be surprised to know that, over the years, many very smart people have applied the most sophisticated statistical and modeling tools available to try to better divine the economic future. But the results, unfortunately, have more often than not been underwhelming. Like weather forecasters, economic forecasters must deal with a system that is extraordinarily complex, that is subject to random shocks, and about which our data and understanding will always be imperfect. In some ways, predicting the economy is even more difficult than forecasting the weather, because an economy is not made up of molecules whose behavior is subject to the laws of physics, but rather of human beings who are themselves thinking about the future and whose behavior may be influenced by the forecasts that they or others make. To be sure, historical relationships and regularities can help economists, as well as weather forecasters, gain some insight into the future, but these must be used with considerable caution and healthy skepticism.”


“The financial crisis that began in August 2007 is the most severe since the Great Depression, and it has been the principal cause of the global recession that began last fall. Battling that crisis and trying to mitigate its effect on the U.S. and global economies has dominated my waking hours now for some 21 months. My colleagues at the Fed and I have been called on to take many tough decisions, including adopting extraordinary and unprecedented policy measures to address the crisis.”


“At the same time, because I appreciate the role of chance and contingency in human events, I try to be appropriately realistic about my own capabilities. I know there is much that I don’t know. I consequently try to be attentive to all points of view, to work collaboratively, and to involve as many smart people in policy decisions as possible. Fortunately, my colleagues and the staff at the Federal Reserve are outstanding. And indeed, many of them have demonstrated their own breadth and flexibility, moving well beyond their previous training and experience to tackle a wide range of novel and daunting issues, usually with great success.”


“You are lucky also to be living and studying in the United States. There is a lot of pessimistic talk now about the future of America’s economy and its role in the world. Such talk accompanies every period of economic weakness. The United States endured a decade-long Great Depression and returned to prosperity and global leadership. When I graduated from college in 1975, and from graduate school in 1979, the economy was sputtering, gas prices and inflation were high, and pessimism–malaise, President Carter called it–was rampant. The U.S. economy subsequently entered more than two decades of growth and prosperity. The economy will recover–it has too many fundamental strengths to be kept down for too long–and the mood will brighten.”

SPX at 908.7 as this post is written

A Limited Time Offer

A Limited Time Offer
Tuesday, June 16th, 2009

I get the feeling that many people believe that we will get many opportunities to resolve The Financial Crisis and the associated economic difficulties now present. In other words, should the already enacted interventions, stimulus plans, bailouts, etc. not work, we as a nation won’t be limited in our number of potential efforts and will be able to roll out still more at later dates.

I think, unfortunately, that this will not be the case. I believe that we have a limited time “window” in which we can resolve The Financial/Economic Crisis, and should we not do so, it will be resolved for us. I don’t believe that most Americans would find the latter alternative to be satisfactory, pleasing, or acceptable.

Disclaimer with this post: Please see the Special Comment if you haven’t already seen it.

SPX at 912.12 as this post is written

Gold and Inflation

Gold and Inflation
Tuesday, June 16th, 2009

Much has been written in the financial press about the possibility of impending inflation, or even hyperinflation. These possibilities are discussed as being likely due to the “loose” monetary policy that has been enacted to combat The Financial Crisis.

If one were to believe that inflation has or will soon “breakout,” one would probably expect gold to perform strongly. At around the current 930 level, gold has “held its own” over the last year, but certainly hasn’t put in what might be called a strong performance, all things considered.

One measure that I follow is the ratio of HUI (an index of gold stocks) to that of the physical metal itself. One theory, perhaps the predominant one, is that the gold stocks should move, or at least verify, the price movements of the physical gold itself. Looking at the weekly chart (seen below) over the last 10 years seems to indicate that although gold has been relatively buoyant over the last year, the gold stocks, as seen by the HUI Index, have lagged since early 2008. One interpretation of this is that the gold stocks are not confirming the move in gold, meaning that gold may soon head down, which could indicate that inflation fears are overstated.

The inflation/reflation/deflation issue is critical to The Financial Crisis. Most people with an opinion on the matter think that deflation isn’t a major threat. While the HUI:Gold ratio is only one measure that can be used, it is important to see what it is indicating at the moment with regard to the inflation/reflation/deflation issue.

(click on chart to enlarge image)

Chart courtesy of StockCharts.com

Great Depression Stock Charts vs Our Current Period

Great Depression Stock Charts vs Our Current Period
Monday, June 15th, 2009

I’m sure everyone has seen the various charts depicting the stock market during The Great Depression to that of our recent period.

The comparisons that I have seen show a definite visual resemblance, and perhaps that is what is attracting such attention, as these charts have proven very popular.

From my perspective, I think that any resemblance is more happenstance than anything else. I don’t expect The Financial Crisis to ”play out” like The Great Depression, either in the stock market or fundamentally via the economy.

SPX at 923.72 as this post is written

New Jersey Analysis

New Jersey Analysis
Monday, June 15th, 2009

I found this on David H. Smith’s “The Grayling” blog. I found it to be very informative and interesting. While it can be easy to dismiss this as one state’s woes, I think this type of analysis applied to all states would be an interesting exercise, as I’m sure the trends indicated have been happening more frequently than one would like to see:


SPX at 946.21 as this post is written

An Economic Brownfield Facet

An Economic Brownfield Facet
Thursday, June 11th, 2009

I am posting a letter from Guy Haselmann, as I believe it is very well-written and illustrates how actions can promote an Economic Brownfield environment. My comments will follow the letter:


To the Editor, May 6, 2009

The Obama administration is creating the next future crisis. Their handling of the Chrysler situation is irresponsible, injudicious, and will have monstrous ramifications. The President libelously scolded investment managers who owned Chrysler bonds for not taking the government’s “deal”. Some fund managers have even gotten death threats. Obama said the managers should “sacrifice like everyone else” and be “patriotic”. Personally, I find this outrageous. Let me explain.

A buyer of a corporate bond is really just a lender of money to the company, who in return for his money receives a “fair” interest rate from the company. Bonds are safer than stocks, and therefore lower yielding, because if the company runs into problems the bond holder gets paid back first. All investors understand that there is a clearly identifiable capital structure which dictates an investor’s priority position to getting paid back.

Anyone who lends money expects to be paid back. But, realizing there is the chance of default, a lender charges a certain interest rate that, in theory, compensates for the risk. In a corporate bankruptcy, there are often plenty of assets left that can be sold to pay back lenders (bond holders) in the order of their capital position, so while the common stock maybe worthless bondholders typically get some money back.

Investors, such as hedge fund and pension managers, bought Chrysler Bonds on behalf of their clients. Every investment manager has a fiduciary responsibility to protect and invest their client’s money to the best of their ability. The hedge fund manager did not accept the administration’s “deal”, plain and simply, because it was unfair, as they could have received much more in bankruptcy court.

Obama abused his power. He had no right to “steal” money from bondholders, and in turn, give it to the labor unions and then call the managers selfish. From what I have seen, hedge fund managers are typically some of the most philanthropic people in society. If you gave your money to a financial advisor, and rather than preserving your capital in a time of crisis, the advisor decided to “be patriotic” by giving it to a labor union, how would you feel? Would you be angry?

The Bush administration did something similar by stripping away the assets assigned to the senior secured bond holders of Washington Mutual, and then giving those assets to J.P. Morgan to help facilitate their takeover of the company. This horrendous decision served to exacerbate the financial turbulence last September. The decision turned the capital structure upside down, i.e., the common stock maintained value, while the senior most lenders were wiped-out. It resulted in a chaotic and broken financial market place.

Most market pundits blame the failure of Lehman brothers as the tipping point of market upheaval. I believe that the ignoring of Delaware corporate law and the decimation of the priority of the capital stack was the true catalyst which destroyed market liquidity, accelerated selling pressures, and made the rules of investing too unpredictable for rational investors.

The precedent being set by government will have unintended consequences and serve to change the behavior of bond investors going forward and ultimately cause a crisis of significant proportion. You see, trillions of dollars of corporate, municipal and sovereign debt will mature and need to be rolled-over (re-issued) in the next several years. By changing the rules of investing and instilling questions as to the true state of the hierarchy of the capital structure pay back, investors will forever price risks differently. Rather than demanding, say, a 6% yield for a corporate bond, an investor may now demand 16%. Such a re-pricing will make debt servicing prohibitively too expensive for many businesses to raise capital and consequently have a deep negative effect on the broader economy. Unfortunately, those most in need of funds will be unable obtain them.

The ultimate result of the Chrysler mess will mean bankruptcy for many smaller businesses, an economy that cannot grow as fast as desired, and a less efficient capital market and one which has wider spreads between borrowers of different credit quality. Any person or company without impeccable credit will now find it difficult to find a loan at a reasonable rate. And tragically, if foreign investors start to question the depth and safety of our capital markets, September 2008 will look like a mere hiccup.

Guy Haselmann, CAIA

Principal, Gregoire Capital LLC



My comments:

This letter illustrates how actions and policy decisions can create an Economic Brownfield. Our economy has been dependent upon cheap and plentiful credit for years; and with the onset of The Financial Crisis, this need has only grown more acute. Actions (both already taken as well as contemplated) that restrict credit and/or make it more expensive will make an environment that makes it harder for businesses to exist and prosper.

During times of stress, like those presently encountered, it is easier to lose track of the “bigger picture,” i.e. what type of environment (Economic Greenfield v. Economic Brownfield) is being promoted by various decisions.


As background on the Economic Greenfield v Economic Brownfield topic, here is my “America’s Economic Future – ‘Greenfield’ or ‘Brownfield’?” article.

SPX at 944.96 as this post is written

In Ben We Trust?

In Ben We Trust?
Wednesday, June 10th, 2009

I will comment frequently on Ben Bernanke, due to his position, but perhaps more importantly, because of his stated theories, beliefs, and ideologies. It seems to me that the handling of The Financial Crisis certainly has the “fingerprints” of Ben Bernanke all over it. In fact, I believe that perhaps no other person’s ideologies have ever played such an outsized role in the U.S. economy (and various other global economies) than those of Ben Bernanke. In my opinion, the U.S. economy (and many financial markets) since The Financial Crisis, can be viewed as an ideologically-levered extension of Ben Bernanke’s beliefs and understandings.

Is this a good thing? It gets back to two central themes of this blog; are we heading toward Sustainable Prosperity? And will America’s Economic Future be one of an Economic Greenfield or Economic Brownfield?

As for me, I will let my writings speak for themselves with regard to our handling of The Financial Crisis. As one can guess, I do respect his background, and believe that he has an exceedingly difficult position; but I don’t necessarily concur with many of his theories, interpretations, or actions.

SPX at 939.35 as this post is written

"Jobless Recovery"

“Jobless Recovery”
Tuesday, June 9th, 2009

It seems as if more and more economic forecasters believe that the economy will progressively get better by year-end, but that employment will lag considerably. Often the “jobless recovery” theme is either overtly mentioned or at least hinted.

Can such a “jobless recovery” exist, given the current level of indebtedness at the personal, municipal, state and national levels?

I have never been fond of the concept of “jobless recovery” as I think it is a euphemism.

SPX at 944 as this post is written

The National Debt and Deficits

The National Debt and Deficits
Tuesday, June 9th, 2009

John Taylor wrote the following article “Exploding Debt Threatens America”:


Although I don’t agree with some of his figures and reasoning, the central point is important: This debt level is a serious problem.

It also illustrates the difficulty of ridding ourselves of this level of indebtedness.

These issues will likely get greater attention now that sovereign debt levels are coming under renewed scrutiny.

Furthermore, a question that should be asked is whether amassing ever-greater deficits and debt levels is compatible with the concept of sustainable prosperity.

I’ve been meaning to write an article about our national debt, as I think the topic deserves much greater discussion.

SPX at 944.37 as this post is written

misc. note - ProsperityByPen.com directory

misc note – ProsperityByPen.com directory
Monday, June 8th, 2009

As previously stated, much of what is written on this blog will reference longer writings on my website, ProsperityByPen.com.

I have created a page that lists all of the material on ProsperityByPen.com; it can be found listed on the right-hand side of this site’s home page, as well as here:


GM - What Could Have Been

GM – What Could Have Been
Monday, June 8th, 2009

Every so often I will mention the plight of GM as I think it has significance on many fronts.

One question that came into my mind recently was “What could have been…” In other words, if GM were to achieve results typical of (at least) a well-run, diversifying/acquisitive company since its peak (defined in an all-things considered, subjective fashion) in the late-1960s, what would it have become?

Of course, at some point antitrust issues might have presented themselves…but nonetheless it would be an interesting exercise, and one that I’m sure would be a real eye-opener.

SPX at 939.84 as this post is written

Ireland's Sovereign Credit Rating

Ireland’s Sovereign Credit Rating
Monday, June 8th, 2009
I found this story to be of significance, regarding Ireland’s sovereign credit rating:


Also, as background info, this story was worth reading:


In my opinion, the broader signficance is that sovereign credit ratings (and associated issues) appear to be getting more scrutiny; and this should only intensify if there is greater economic weakness.

SPX at 939.02 as this post is written

"Opportunity of a Lifetime"?

“Opportunity of a Lifetime”?
Monday, June 8th, 2009

One phrase that I have heard mentioned a few times is that the economic and market declines of 2008-early2009 created a “Opportunity of a Lifetime” to buy stocks, businesses, and other assets.

I am not sure what reasoning is used to justify the “Opportunity of a Lifetime” phrase (and no reasoning has been provided). It would seem, however, that for this to be true, one would have to believe that the severe market and economic declines experienced in 2008 and early 2009 were transitory and presumably represented some inexplicable downdraft that will have no ongoing significance. In other words, now things are getting back to “normal,” and the trends we have seen from 2002-2007 (if not earlier) will return…i.e. strong markets for assets and strong corporate performances.

Readers of this blog know that I am not of that opinion. I believe that we are in a completely “new environment,” and that, as such, it is dangerous to rely on historical trends for forecasting or valuation purposes.

For those who are skeptical of this “new environment” classification, I could (and have) provided various arguments; however, one point in particular I would highlight is never before have we had such pervasive (and large scale)government intervention and “guarantees” in existence in various markets. In my opinion, this alone indicates we are in a “new environment.”

SPX at 929.02 as this post is written

Bernanke's June 3 Testimony

Bernanke’s June 3 testimony
Monday, June 8th, 2009

Ben Bernanke testified before a House committee on June 3. Although it doesn’t appear as if he said anything new or different from his previous public statements, I found one statement to be significant. It is bolded below:

“We continue to expect overall economic activity to bottom out, and then to turn up later this year….An important caveat is that our forecast also assumes continuing gradual repair of the financial system and an associated improvement in credit conditions; a relapse in the financial sector would be a significant drag on economic activity and could cause the incipient recovery to stall.“

He has stated this “caveat” in various ways recently. I find it to be interesting, if not a little puzzling. In my opinion, it is almost like saying, “It will be sunny tommorrow, unless it rains.”

I’m not sure as to his reason for including this phrase, but I think it significant nonetheless…

SPX at 930.96 as this post is written

Bear Market Rally

Bear Market Rally
Monday, June 8th, 2009

My view on the stock market rally (as seen by the S&P500, often denoted on this blog as SPX) that began on March 6 (at ~666) and peaked on Friday (at ~951) is that it is a bear market rally. And it certainly has been generous, given the fundamentals of the economy.

I think it is likely that Friday’s 951 level will mark the end of this rally, although of course that may prove inaccurate.

For those unaware as to what a bear market rally is, a summary is that it is a countertrend move (up) during the course of a bear market. They are often strong and relatively quick.

I recently came across this article about the history of bear market rallies that I found valuable:


SPX at 928.52 as this post is written

Ben Bernanke Quote

Ben Bernanke quote
Friday, June 5th, 2009

I saw this quote in Charles Schwab’s “On Investing” magazine, Summer 2009 page 6. It is attributed to Ben Bernanke:

“Over the years, the U.S. economy has shown a remarkable ability to absorb shocks of all kinds, to recover, and to continue to grow.”

I’m not trying to single out Ben Bernanke with regard to this quote, as we’ve heard this general theme, with numerous permutations, repeated countlessly by others.

However, I feel the concept itself is significant. To me, it is indicative of complacency and seems to downplay the importance of decision making and analysis. Every time I hear this concept repeated it causes me to cringe.

SPX at 937.8 as this post is written

Perverse Effects

Perverse Effects
Friday, June 5th, 2009

I saw this story in The Wall Street Journal a few days ago, titled “The New Resume: Dumb and Dumber”


It says a lot about our current economic climate when people feel compelled to understate their credentials in order to appear more attractive for available positions.

While it is unknown as to how widespread this type of behavior is, it is nonetheless significant and telling. We do know for a fact that there is a significant problem with “underemployment” in this country – and by “underemployment” I am speaking of the generalized concept, not how the government officially classifies, and measures, it.

Without writing a long paper on this subject, I will summarize by saying that in the “larger scheme of things”, this type of seemingly perverse behavior of understating credentials hints of an “economic brownfield” environment.

For those unaware of the “economic brownfield” concept, here is my article on the subject:


SPX at 939.5 as this is written

misc. note

misc. note
Friday, June 5th, 2009

Readers of this blog may want to read a special comment; it is listed below:

Comment – Special

As you will notice, much of my blog posts and writings point to a difficult and painful future resolve to our economic difficulties, or at least sound a cautionary note with regard to actions that have and/or will be taken to improve our economic problems. These opinions are based upon my analysis of the economy.

There can be no assurances that my analysis, and resulting views, are correct. In fact, most of the professional economic and financial community, Federal Reserve, and politicians have provided forecasts and analyses that currently point to an economy that is at or near “bottom”, with the worst damage behind us. This conclusion is in sharp, dichotomous contrast with the conclusions I have drawn.

In many ways, I wish my analysis proves completely incorrect, and that we are well on our way to Sustainable Prosperity.

A note about politicians and government officials

Occasionally I mention politicians and government officials by name. I am of the opinion that our current economic difficulties have not been caused by one, or even a few politicians. Many have inherited very difficult situations.

Recently, I heard a political commentator say that he felt as if most politicians have a genuine interest in providing benefit to the country. I would like to believe that is the case.

this page written on June 1, 2009; SPX at 942.87


Thursday, June 4th, 2009

Here is an interesting New York Times editorial regarding foreclosures. Please note that I don’t necessarily agree with many of the recommendations, but the editorial does a nice job of summarizing some of the problems:


“Solving” our residential real estate problems is going to be most difficult, in my opinion. It is a very complex issue with realms of complexity that are not understood. Once you add politics, as well as the emotional factors inherent in residential real estate, the issue becomes frightful.

Recently I read someone say that the only way for the housing market to recover is to let prices fall to a point where the market would “clear itself,” so to speak. It might well come to that – but I’m afraid that the “market clearing price” (on an all things considered basis at some point in the future) would be much lower than anyone would care to imagine.


Tuesday, June 2nd, 2009
This was an interesting editorial in The Wall Street Journal a few days ago concerning the “redefault” rate:


These statistics are problematical, especially if one believes the economy will stagnate or worsen from this juncture.

It also raises the question as to the effectiveness of intervention measures on default rates and housing prices. Many of the current interventions are geared toward stemming foreclosures, either directly or indirectly.

For those who have not yet seen it, David H. Smith has put together a Household Initiative Plan, found here:


I find it appealing in many regards; perhaps chief among them is that it promotes the idea of having homeowners spend their own money on their own real estate, instead of solely relying on government bailouts and interventions to assist financially troubled homowners.

In ways it’s akin to the investment idea of investors having ”skin in the game.”

I’ll be commenting a lot more on real estate on a going-forward basis, given its importance and that there are a lot of complicated dynamics in that market.

GM Bankruptcy

GM Bankruptcy
Tuesday, June 2nd, 2009

There is so much that can be said about GM’s demise, as well as how its bailout has been handled.

It is rather mindboggling to realize that at its peak, it was the most powerful company in the world.

I’ve been trying to recall how many times major stories have been published over the years about GM’s “impending turnaround.” It has been many.

Rep. Barney Frank interview - My Comments

Rep. Barney Frank interview – my comments
Monday, June 1st, 2009

Here is a recent interview of Rep. Barney Frank on CNBC. I found the first few minutes to be interesting, as well as disconcerting in many ways:


What nearly everyone, especially the decision-makers in Washington, don’t seem to grasp is the risks inherent in large-scale market interventions. One question to ask might be, ”If large-scale market interventions are so beneficial, and carry no or little risk, why haven’t we been doing them previous to the onset of the Financial Crisis?”

Furthermore, there seems to be little discrimination between “quick-fix” solutions to problems vs. those of substantive value.

It all gets back to the issue of Sustainable Prosperity – what will America’s economic future be and how can we insure that it will be an “Economic Greenfield” and not an “Economic Brownfield?”

As an aside, I did send Rep. Frank an email message on January 14 alerting him of my concerns at the time, as well as of ProsperityByPen.com

10-Year Treasury Yield

10-year Treasury Yield
Sunday, May 31st, 2009

It is interesting that there has been relatively little commentary on the increase of the 10-year Treasury yield.

In my opinion the rise is significant in many ways. Perhaps chief among them is the fact that the yield has risen sharply (to a current 3.46%) despite a large-scale intervention designed to bring yields lower. This divergence is significant because it raises the question as to whether we are witnessing a failed intervention. While it is probably too early to classify it as such (due to, among other things, the fact that there is likely to be more purchases) perhaps the word “errant” might be more appropriate at this juncture. At any rate, the increase in yields bears close watching.

Upon originally hearing of the intervention plans to purchase Treasury and Mortgage Backed Securities in order to bring rates down, I thought the plan was flawed in many fashions, both theoretical and practical.

For those unaware, I have previously written an article that discusses the hidden risks and unintended consequences of interventions; it can be found here:


Sustainable Prosperity

Sustainable Prosperity
Sunday, May 31st, 2009

One term that I will use very frequently is “Sustainable Prosperity.” The term exemplifies the ultimate goal of what our national policies should be seeking to attain.

Inaugural Post

Inaugural post
Thursday, May 28th, 2009

I have read that there are 60,000,000 blogs on the internet. Assuming this is true, why create # 60,000,001?

Because I believe that the Financial Crisis, and our future economic situation, has been discussed incompletely and/or inaccurately. In my opinion, there is a societal misunderstanding of the Financial Crisis, its potential risks, and probable outcomes. To say there is much “on the line” here would be a vast understatement.

This blog will heavily reference writings from my website, http://sites.google.com/site/prosperitybypen/home

Monday, June 29, 2009