Monday, August 31, 2009

More On The FDIC Situation

On August 7th I posted some commentary titled "The FDIC Situation." Here is a story from The Wall Street Journal that does a good job of summarizing the situation there:

One of the statistics of interest:

"The FDIC's insurance fund, which guards $6.2 trillion in U.S. deposits, fell to $10.4 billion at the quarter's end, the lowest since mid-1993."

While there are many variables that will determine the ultimate figure the FDIC may need to cover its guarantee obligations, it seems as if this situation could well become very significant. Many trends and conditions seem to be aiding the possibility of bank failures.

SPX at 1028.93 as this post is written

Friday, August 28, 2009

President Obama's Remarks on Ben Bernanke

On Tuesday President Obama made remarks upon nominating Ben Bernanke for a second term as Fed Chairman. The remarks can be found here:

I would like to comment on some of the phrases President Obama used in these remarks.

President Obama says, "The man next to me, Ben Bernanke, has led the Fed through one of the worst financial crises that this nation and the world has ever faced."

and later:

"Ben approached a financial system on the verge of collapse with calm and wisdom; with bold action and out-of-the-box thinking that has helped put the brakes on our economic freefall."

and later:

"But taken together, this "bold, persistent experimentation" has brought our economy back from the brink."


In the second phrase, I found the use of the word "approached" to be odd.

However, the greater significance in the above phrases is the reference to "bold action and out-of-the-box thinking" and "'bold, persistent experimentation.'" I was surprised to see the word "experimentation" mentioned; one would usually not think of an economy being "experimented" upon. However, the description is probably accurate given what has transpired. Perhaps the bigger question is whether the "experiment" has ended? Has it been a success?

With regard to this "out-of-the-box thinking" and "'bold, persistent experimentation'" I would like to refer to a speech Janet Yellen (President and CEO, Federal Reserve Bank of San Francisco) gave on January 4, 2009. In it she said that with regard to the Federal Reserve actions: "“Furthermore, many of the interventions are novel, so no straightforward methods are available to quantify their effectiveness. There are also no clear guidelines for the Fed to gauge the appropriate size of its interventions and few precedents for the Fed to use in communicating its policy stance to the public beyond announcing new programs and describing their terms in detail.”

SPX at 1030.98 as this post is written

Thursday, August 27, 2009

The Latest 10-Year Budget Projection

Yesterday, The Wall Street Journal came out with a story titled "A Decade of Debt" that can be found at this link:

It discusses the latest 10-year budget projections that amount to a cumulative addition of $9 Trillion in debt.

I would like to briefly comment on this latest budget projection:

-As seen in the article, there are no projected budget surpluses throughout the entire 10-year period.

-Historically (at least the last couple of decades) these projections always seem to be too optimistic - meaning that the deficits realized are usually higher than planned. I wouldn't doubt this to be the case for this budget as well. The economic projections of the last budget were criticized as being too optimistic, and as seen in the chart indicated in this article, economic projections to 2012 assume a very favorable economic climate including robust GDP growth and low inflation.

As well, an additional issue is presented, one that I have commented on as recently as my post of August 21. There seems to be a "growing insensitivity to higher deficits and debts." No one seemed especially surprised or aghast upon release of these numbers. It appears that as time goes on, ever-larger deficits and debts seem to "legitimize" even larger deficits and debts, to the point where even a Trillion dollars, once inconceivable as an annual budget deficit, now almost seems "normal."


For those who may not be aware, I recently wrote an article titled "America's Trojan Horse - A Different Look at The National Debt" which can be found listed under the Pages section on the right-hand side of the home page.

SPX at 1018.35 as this post is written

Wednesday, August 26, 2009

Thoughts on Ben Bernanke's Tenure

With the announcement that Ben Bernanke will be nominated for a second term as Federal Reserve Chairman, I would like to make a few comments.

First, a brief review of some of the comments others have made with regard to Ben Bernanke's tenure. Here is a quote from Paul Krugman, as seen in the following August 10 Bloomberg story:

“I think Bernanke has done a really good job,” Krugman said. “He failed to see this coming and he was behind the curve in early phases. But he’s been really very good in the sense that it’s really very hard to see how anyone could have done more to stem this crisis.”

Krugman's opinion seems to be largely in line with sentiments recently voiced by many other economists.

As well, other popular thoughts on Bernanke seem to be summarized well in this article:

My thoughts on Bernanke haven't changed. I have periodically remarked on him; those remarks can be found in the "Ben Bernanke" category listed along the right side of the page. Perhaps my June 10 post is the best summary of my thoughts.

As well, I will say that I feel that there have been many significant aspects of Ben Bernanke's actions that have gone unnoticed, and/or have not been commented upon by anyone.

I will continue to comment on Ben Bernanke on an intermittent basis.

SPX at 1027.76 as this post is written

Tuesday, August 25, 2009

The CRE Problem

I would like to highlight an article from last Thursday titled, "Second Wave of the Credit Crisis: Collapsing Commercial Real Estate" It can be found at this link:

The article gives a good summary of the Commercial Real Estate (CRE) situation as well as makes other interesting observations.

CRE is yet another huge, menacing problem area inherent in our current economic situation.

SPX at 1025.57 as this post is written

Monday, August 24, 2009

A Classic Article Revisited

One of the classic articles of the housing bubble is "America's House Party" from Time Magazine, June 2005. It really provides a flavor of the period, as well as provides a perspective of a bubble environment.

Here is the link:,9171,1069097,00.html

SPX at 1032.81 as this post is written

Friday, August 21, 2009

Expanding Upon Two Concepts

I would like to briefly expand on a couple of points I made in my recently posted "America's Trojan Horse" article (which can be found listed along the right-hand side of the main page.)

First, I wrote, "There also appears to be a growing insensitivity to higher deficits and debts." This is alarming, as sums of money that recently (as of 1-2 years ago) would have been considered exceedingly high are now seen as relatively low. An example of this was the $150 Billion tax rebate (stimulus) that was distributed in the late spring and summer of 2008. At the time, an $150 Billion stimulus was considered very substantial. However, with the stimulus and interventions that have been enacted since, this $150 Billion amount almost seems relatively small by comparison.

I fear that we, as a nation, may be losing our perspective and comprehension of the sums involved here. While spending, or committing, $1 Trillion and multiples thereof (or $1 Billion for that matter) has become rather commonplace during this period of economic weakness, one should be mindful of the difficulty in earning (as in profit) these amounts of money.

The second concept I would like to expand upon is that of "Intellectual Leadership." I devote a paragraph in the paper to this concept. The phrase is not one which is often heard, which is unfortunate. Nonetheless, I think it is a very important concept, especially during this period.

SPX at 1007.37 as this post is written

Thursday, August 20, 2009

The Importance Of Dealing With Problems Early

During his July 22 Press Conference, President Obama said healthcare is "a problem that Washington has failed to solve for decades."

Unfortunately, the healthcare problem isn't the only problem that has been "brewing" for a long time.

It is imperative that problematical issues are dealt with effectively when they are in their early stages. Otherwise, if we wait for years, the issues often become incredibly complicated and costly to fix, as is the case with healthcare.

SPX at 1001.85 as this post is written

Wednesday, August 19, 2009

Healthcare - A Few Thoughts

As President Obama said during his July 22 Press Conference, healthcare is "a problem that Washington has failed to solve for decades."

I want to make a few random comments about healthcare. Any substantive discussion on my part would be exceedingly lengthy as this is a complex subject.

I do believe that there has to be major changes made, and quickly. There are many large problems with the healthcare system in a variety of areas.

However, I think that in order to make effective changes, there has to be a greater understanding of the problems inherent in the current system. As well, there should be an examination of some of the current assumptions being made.

Some questions I would ask are:

Should government be involved in healthcare? Why?

What are the underlying problems of the healthcare system?

Do we fully understand the problems of the healthcare system?

What would be the attributes of a perfect healthcare system?

Are there models analogous to the healthcare scenario that a person faces? What can we learn from them?

Also, I wanted to exhibit this recent op-ed from The Wall Street Journal. John Cochrane makes some interesting points that are worthy of contemplation:

SPX at 982.51 as this post is written

Monday, August 17, 2009

What Is The Stock Market "Telling" Us?

With the stock market (as seen in the S&P500) recently near the 1020 level, there is no debating that the rally since the early March lows of 666 has been a very strong one. Also, there have been very strong rallies in other markets as well (Nasdaq, Emerging Markets, Debt Markets, etc.)

Given this strong rally, one is led to wonder as to what the stock market is "telling" us. Such a strong rally in the face of pervasive economic weakness seems contradictory.

The stock market seems to be indicating that we will have a strong and quick economic recovery (likely a "V" recovery). This can be inferred in a variety of ways. One way would be to assess the S&P500's current price level of 1000, in which we can see that it is pricing in a market PE of 20 to a 2009 operating earnings estimate of $50. As well, this would equate to about 13x a 2010 operating earnings estimate of $75. Of course, one can argue whether the "As Reported" figures should be used, which would generate an even greater earnings multiple.

As I have indicated previously, I believe this market rally off the March lows of 666 is a Bear Market Rally - meaning by definition that a low below 666 will be forthcoming. I'll be further addressing this issue shortly.

The stock (and other markets) rally since mid-March appears to me to be very "speculative" in a variety of ways. One need not look too far to see many disconcerting aspects of this rally.

Since the stock market seems to be "pricing in" a very significant, and lasting, economic recovery, there will likely be significant repercussions should one not materialize. These repercussions would likely entail a significant decline.

Perhaps the main question should be whether a strong economic recovery is fundamentally assured to the extent the stock market seems to be indicating.

SPX at 982.3 as this post is written

Median Duration of Unemployment

I think the following chart is one that surely deserves attention:

(click on chart image to enlarge)

UEMPMED_St Louis Fed 8-16-09

Source: St. Louis Federal Reserve

It shows the Median Duration of Unemployment. One notices the trajectory of the chart during our current period of economic weakness.

Although I have reservations as to how the data on this chart is derived, I do think it is important to monitor this chart on an ongoing basis.

This chart seems to further validate the assertion I have made before on this blog - that we are in a new (economic) environment.

SPX at 1004.09 as this post is written

Friday, August 14, 2009

New Article: "America's Trojan Horse"

I just posted a new article titled "America's Trojan Horse." The subtitle is "A Different Look At The National Debt."

The article goes well with many of the themes presented on this blog, including Sustainable Prosperity, America's Economic Future, and the overall quality of decision making in policy.

Please let me know of any comments.

SPX at 1002.26 as this post is written

Thursday, August 13, 2009

Double-Digit Revenue Declines

The August 17 edition of Business Week, p19 had a column titled "A Record Revenue Decline." It can be found here at the bottom of the page:

This line is especially noteworthy: "This marks the first time since S&P started tracking quarterly revenues (in 1993) that revenues dipped 10% or more for three quarters in a row."

Although the idea of lumping all S&P500 revenues together is perhaps not an optimal way to look at this situation, it still would seem to indicate that the situation with regard to falling revenues is very significant.

As I have commented previously, companies experiencing double-digit revenue declines make for a very challenging and stressful environment, especially as these double-digit declines continue each quarter.

SPX at 1003.52 as this post is written

Wednesday, August 12, 2009

Debunking a Popular Phrase

One of the phrases that I have heard innumerable times is that our current period of economic weakness "isn't as bad as The Great Depression because during The Great Depression unemployment was at 25%."

While I have commented repeatedly on this blog that I don't believe we should be equating our current economic condition to that of The Great Depression, I would like to comment on the phrase above.

As one can see on the chart found in this The Economist article:

the unemployment rate during The Great Depression peaked at 25%. Also of note is the steady yet unrelenting climb in the rate leading to this peak.

Another issue that would need to be factored into any discussion of the two periods' unemployment rates is that of comparibility. While I haven't seen any well-documented analysis of the methods used during each period, the prevailing wisdom appears to be that our current unemployment rate is understated vs. that used during The Great Depression.

As I have stated previously on this blog, (on the "Why Aren't Companies Hiring?" series that started on July 24) "The unemployment issue currently facing the country is severe and complex." It is important that we keep it in proper historical context.

SPX at 1005.73 as this post is written

Tuesday, August 11, 2009

The Hyperinflation Theme

One of the more prevalent themes mentioned has been the possibility, or probability, of hyperinflation. Hyperinflation is often mentioned due to the degree of "money pumping" and other intervention measures that have occurred in the last two years to combat this period of economic weakness.

However, despite all of the predictions of hyperinflation, there appears to be no signs of it. One would think that if a hyperinflationary environment were present, gold would be a strong performer. However, gold is currently near $945, a level near the upper range of its movements since 2008.

Of course, hyperinflation can still yet occur, but so far no manifestations appear evident.

SPX at 996.36 as this post is written

Monday, August 10, 2009

Martin Feldstein's "Underwater" Mortgage Plan - My Comments

In the Saturday edition of The Wall Street Journal, there is an op-ed from Martin Feldstein titled "How to Save an 'Underwater' Mortgage."

The editorial provides a good summary of the numbers behind "Underwater" mortgages. Also, I think the article is beneficial in that it highlights the problem of mortgage defaults and foreclosures, and how "Underwater" mortgages can exacerbate the default/foreclosure crisis.

As the editorial progresses, Martin Feldstein lays out a plan for curtailing the potential problem presented by these 'underwater' mortgates.

It is concerning this plan that I would like to comment. I'll keep the comments to a minimum, as this "underwater" mortgage situation and what to do about it is one that I could write very extensively about...

First, this proposal would entail (yet) another intervention, and as such is subject to the potential risks and unintended consequences of interventions, of which I have previously written.

With regard to this specific proposal ~

One of the problems I see with Martin Feldstein's plan, and one which recurs frequently with all the bailouts, is that it helps those that, at least by the stated loan-to-value metric, have acted most in error. Some may use the term "have acted most irresponsibly." In the case of these underwater mortgages, Feldstein proposes to have a certain amount of each mortgage reduced for those who have loan-to-value ratios of over 120%. This is a major issue in that it calls into question the aspect of fairness, a factor I have previously written about.

Another problem I see with the proposal is that it it appears to inherently assume that the current population of 120%+ loan-to-value ratio homeowners is static. If residential real estate were to decline further, this population would likely increase, perhaps substantially. In fact, in such a falling residential real estate scenario, a homeowner could have his mortgage rate reduced to 120% loan-to-value and then return above this level quite easily.


As I wrote in a June 4 post:

“Solving” our residential real estate problems is going to be most difficult, in my opinion...."

SPX at 1010.48 as this post is written

Friday, August 7, 2009

The FDIC Situation

Ever so often I come across a story concerning the FDIC and its wherewithal to be able to cover its potential commitments.

It appears to be exceedingly thinly funded in relation to potential liabilities. This may not be a big issue going forward if the economy improves; however, it could become a very large issue if the economy deteriorates from here.

While there is little doubt that the government would lend additional funds to the FDIC, if needed, it is one more item that could serve to significantly bolster the nation's level of indebtedness.

One is led to wonder how purchasers of U.S. debt view the rising level of indebtedness, as well as the potential for all of the various federal "guarantees" of assets to add to the debt level.

SPX at 997.08 as this post is written

Thursday, August 6, 2009

"Underwater" Mortgages and "Strategic" Defaults

This article caught my interest; it is titled "About half of U.S. mortgages seen underwater by 2011":

Apparently their projections for "underwater" mortgages is based upon their forecast quoted in the article: "Covering 100 U.S. metropolitan areas, Deutsche Bank in June forecast home prices would fall 14 percent through the first quarter of 2011, for a total drop of 41.7 percent."

While I haven't spent the time to really develop an in-depth projection of my own as to where the "bottom" will be in residential real estate, I do believe it will be far lower than an additional 14% decline, for a variety of reasons. If this becomes the case, the "underwater" aspect quoted in the article would presumably be exacerbated.

The Deutsche Bank forecasts mentioned in the article can also be read in conjunction with some other interesting research recently published with regard to "strategic" defaults, which was mentioned in this Economist article from 6/25/09:

This "strategic defaults" issue is important and bears close monitoring going forward, especially if more mortgages go "underwater."

SPX at 997.08 as this post is written

Coming Soon - "Cash for Sneakers"?

Perhaps some have seen a recent Wall Street Journal editorial that commented on the economics and logic of the "Cash for Clunkers" program; it is subtitled "Let's have a $4,500 subsidy for everything" and can be found here:

In one of the articles I have written, titled "Intervention's Potential Blindspots" which is listed halfway down the Directory Of Articles.

I wrote the following concerning stimulus and intervention programs (point #8):

Setting of precedents – Originally the bailouts were directed toward major banks and brokers under the pretense of having to protect the integrity of the overall financial system. However, as time has gone on, the recipients of aid has expanded into other areas. As the list of recipients widens, so does the rationale for providing more aid…as does the list of those expecting aid. Thus a vicious circle arises. If taken to extremes, basically any business or economic entity could claim duress because of poor economic conditions, and thus need – as well as claim entitlement for – aid. Some of the current arguments for providing intervention are exceedingly convoluted and weak. Despite these shortcomings, they are being given credence (and in many cases funding), thereby establishing a weak argumentative standard that can be copied and exploited by other parties. The mere fact that certain of the arguments are so fatuous relatively early in the “entitlement” cycle bodes very poorly, signaling that by the aforementioned vicious cycle effect the entitlements “spectrum” may prove to be very wide.


Unfortunately, the entitlements spectrum is "widening" as time goes on, as mentioned in my article. Which leads one to wonder how, or if, the stimulus entitlements spectrum will be limited.

Recently I saw the phrase "Cash for Sneakers" mentioned ~

SPX at 999.69 as this post is written

Wednesday, August 5, 2009

Another Underexplored Facet of Stimulus Programs

One of the criticisms I have read of the "Cash for Clunkers" stimulus is that the program is poorly administered.

It seems disconcerting that such a seemingly simplistic program like the "Cash for Clunkers" program is poorly administered. One is led to wonder how more complex programs will be managed.

The effectiveness, and efficiency of how stimulus is administered is very important yet rarely discussed.

SPX at 998.59 as this post is written

Tuesday, August 4, 2009

"Cash for Clunkers" Is A "Junker"

"Get your share of the stimulus!" is a slogan that has typified the auto dealer advertising for the "Cash for Clunkers" program.

For many reasons, I think that the "Cash for Clunkers" program is highly flawed on an "all things considered" basis and should have never been legislated.

Without writing a "book" on the subject, here are a few of my thoughts....

First, as a stimulus program it carries all of the potential risks and unintended consequences of intervention programs, of which I have previously written. These potential risks and unintended consequences should not be overlooked.

Second, the specifics of this "Cash for Clunkers" program carry an array of troubling aspects...

Like most stimulus programs, "Cash for Clunkers" has a thin "veneer" of seeming benefit - until one starts analyzing the program in totality. In this case, the "veneer" is that the program appears to be a "win-win-win" situation - from an environmental perspective, older cars with relatively poor fuel efficiency (and concomitant emissions) are taken off the road; from a consumer perspective, the auto buyer is given "a break" in the form of the reduced purchase price; and from an automaker / GDP perspective car sales increase. So far the government has allotted $1 Billion for the program and is contemplating an additional $2 Billion.

Here are some problems specific to the program, when one views it on an "all things considered" basis:

As some people have mentioned, car sales are being "borrowed" from the future. This is a major issue.
Although automakers are making sales, they are doing so at a discount. Discounting holds many risks from a business perspective; these risks should be known by automakers as it has been a serious industrywide problem in the past, especially for those automakers that have abused the practice.
Another troubling issue - first the U.S. government props up the auto industry - this can be viewed as the "supply" side. Now, it is "encouraging" the "demand" side. This dual aspect should be pondered significantly - but hasn't been.
The purported "environmental" benefit should be questioned and examined. Is the benefit worth the cost? Is it scientifically valid? Might there be better programs, from an environmental standpoint, that could be enacted?
There are other issues, some very troubling, that exist as well.

Another tangential issue is whether the legislative "rush" to expand the program is appropriate. Should the program's popularity among auto dealers, automakers, and qualified car buyers hold inordinate sway given the larger problematic issues mentioned above?

While some may dismiss the questions presented above as relatively inconsequential given the program at this point is "only" potentially $3 billion, this isn't how such legislation should be viewed. Whether it is $3 million, $3 billion, or $3 trillion, the rigor of the policy process should be constant.

In summary, Congress should "junk" the "Cash for Clunkers" program. People will "get their share of the stimulus" in other ways - the only problem is that it won't be something to look forward to...

SPX at 1001.65 as this post is written

Monday, August 3, 2009

Bank Bonuses and Broader Implications

I'd like to make a brief comment about the "bank bonus" story that came out a few days ago. Here is one article on it, titled "Bank Bonus Tab: $33 Billion" from The Wall Street Journal on 7-31-09:

Needless to say, it seems outrageous that such bonuses, in said amounts, were paid out so broadly in 2008 given the overall situation - especially for those banks that would have otherwise collapsed absent tremendous levels of government intervention. Of course, there may be some mitigating factors or legitimate reasons for at least some of these bonuses, but I have yet to read or hear of any.

It seems as if this bonus issue should have been adequately addressed before any intervention funds were allotted to the various banks.

Overall, I think the two major issues concerning these bonuses are Fairness, as well as the impact on Moral Hazard.

As I have alluded to previously (on a 6/21/09 post) the Moral Hazard environment that has been created and perpetuated over the last few years is truly epic and mind-boggling. It appears as if this Moral Hazard situation has only been exacerbated with the Bank Bailouts that have occurred during The Financial Crisis.

Moral Hazard implications are very important, even if (seemingly) few people really want to think about them. Moral Hazard has many types of direct and indirect effects ranging from our potential National Debt to issues regarding Sustainable Prosperity to issues concerning Fiduciary Responsibility. Part of the challenge, and importance, of crafting appropriate national policy is to consider, in totality, how the economic environment will be impacted by various government actions. To ignore, or downplay, Moral Hazard implications is a serious mistake.

SPX at 1002.63 as this post is written

Another Mention of The Great Depression

On July 26th Ben Bernanke said, ""I was not going to be the Federal Reserve chairman who presided over the second Great Depression." The quote and associated details can be found here:

I found the quote interesting primarily as it once again underscores the popularity (or should I say fixation) that many people, including prominent economists, have in comparing (and associating the characteristics of) our current period of economic weakness with that of The Great Depression. As I wrote in my July 13th post, I think that viewing the two periods similarly is not only incorrect but perilous.

SPX at 987.48 as this post is written