Sunday, April 26, 2009

The First One Hundred Days

I guess this title is supposed to conjure up the image of FDR battling the great depression. After all, when Obama took office the unemployment rate was 7 percent. That's pretty awful. It is a little worse, but not much worse, than the average unemployment rate of the eight year Clinton Administration.

What did FDR face? Try 25 percent unemployment. Why is 7 percent considered the same as 25 percent? Must be the new math! Certainly it's not the old math. Admittedly once, briefly, during the 1930's unemployment touched 14 percent (before it rebounded back to over 20 percent) and everyone shouted hallelujah. Do you think Obama will cheer when unemployment touches 14 percent?

So, it isn't exactly clear to me what the parallels are? The banking system? In January of 1933 when Roosevelt was sworn in as President over 1/3 of all commercial banks in the United States had failed and GDP was one third lower than it had been four years earlier. When Obama assumed office fewer than one percent of all commercial banks in the US had failed in the prior four years and (prior three month) GDP was actually higher in January of 2009 than it had been when Bush began his second term. Another interesting parallel? (I am losing track of why this is a parallel!).

Anyway, back to the "First One Hundred Days." (Maybe we're comparing it to Jimmy Carter's first one hundred days. Now, there is a true comparison on many levels!).

So, what has been accomplished in the first 100 days? We have added two trillion to the national debt and have plans to add another two trillion before this administration is up for re-election. That is certainly a record! No one in history (in the US or anywhere in the world) has ever done that before. In fact, no one in history has ever done 1/3 of that!! Congratulations, Mr. President! That will be a new record, by a wide margin indeed!

What else? We have announced that our economic problems boil down to "greed and corruption." In case you don't know much about greed and corruption, let me give you a quick primer. Greed and corruption came to the US in January of 2001 and was ushered out in January of 2009. Geithner, Rattner, Gov Richardson, Elliot Spitzer (ooops, how did he get in here?), Emanuel, Daschle, Murtha, Gov Blagojevich are showing us the way.

Our problems can be solved by more debt....and letting people get out of paying their existing debt ....and giving Wall Street (those greedy, corrupt folks) billions and billions of dollars. That sounds like good policy to me. On the backs of that, we should build a terrific long, lasting recovery. Thanks, Mr. President!

Let's see what the next 100 days will do for us.

Tuesday, April 21, 2009

Why TALF Has No Shot

My good friend, Vince Farrell, a regular on CNBC, has unearthed a true gem. Buried in a 247 page report from Neil Barofsky, special inspector general for TARP, is the statement:

"Fund managers who seek to be co-owners of P-PIP investment partnerships...might face pay limits."

P-PIP investments, for the unitiated, are exactly the investments proposed in the TALF program.

That's great. I bet Blackstone is dying to fall under the pay limits set by the US Treasury and Barney Frank. Guess what! For reasons that Geithner can't figure out (he says), practically no one is lining up to do the TALF, the long-awaited government response to the ABS lockup that has paralyzed financial markets. So far, the $ 1 trillion proposal has attracted $ 5.2 billion worth of activity. Perhaps our grandchildren will see the half way mark of this plan.

Why not just announce that anyone who participates in this program will be taken out and shot at dawn? That ought to attract a lot of folks as well. (After all, some people are suicidal!)

This Administration continues to shoot itself in the foot, with grace, it must be said. May as well look good, even if what you are doing is wasting a lot of time and a lot of money.

Incidentally, why doesn't the President set some limits on White House extravagance. Taking 500 people on five jets, first class all the way, is what President Obama recently did on his trip to the G-20 fiasco. Wonder what that cost? The night after night of White House parties. What do they cost? Are taxpayers picking that up? Why are government bureaucrats and politicians exempt from the pay rules? I noted that the Obamas listed $ 2.5 million in adjusted gross income on their 2008 tax return...pretty good for folks that spent the entire year campaigning...must be nice!

Sunday, April 19, 2009

Fixing Credit Card Abuse - More Obama Nonsense

Here's the latest Obama "reform:" Fix the credit card system to prevent further abuse, says the White House.

The abusers, of course, are not the people who apply for these cards, buy things with these cards, and then refuse to pay the bill when it comes...nope, not those folks. They're just getting by, having a little fun, buying a few things here and there.

The abusers are the lenders -- the people who issue these cards (and provide funds for all of these innocent victims who are out buying things that they cannot afford (but which they will keep)). Now, Obama, who knows better than the market (must have learned a lot as a community organizer) is going to have the government issue new rules to regulate what interest rates can be charged to credit card delinquents. Obama should be an expert on that subject, I would suppose.

No doubt the credit card companies will respond by denying credit to those of doubtful credit. Then, of course, the credit card companies will be accused of "discriminating" against low income folks and so forth and so on. Why not just have the credit card companies send people, that Obama approves of, cash .. every month, why not? Or better yet, why not nationalize the credit card companies (regulating them in this fashion is not that far from nationalization anyway...heck, why not just let people spend whatever they want and not pay bills anymore. That's probably where this is all headed anyway. Why not pick and choose who has to pay and who doesn't. We can find a fair way to do that, can't we. The same guy that makes that decision can make the decision as to who gets health care and who doesn't in the coming Obama health care regime. Hard choices, says the President (that means you don't get chosen!).

Who owns the credit card companies, you might ask? Is it some collection of devils who are gleefully raking it in and taking advantage of these poor credit card users? The answer is: you!. Yes, you! (you devil!). You own the credit card companies, you greedy person. You also own the banks, the insurance companies, the auto companies and yes, the tobacco companies (and all those companies that are unfriendly to the own them too). The biggest single stockholder in America is the American worker, who owns these companies in his/her pension fund. I think we should tax these corporations even more...these stockholders are getting too much (that means your retirement is going to be too much...lets reduce it some by increasing taxes on the stocks that you own).

It is one of the great ironies of modern times that citizens vote to tax themselves enormous amounts, thinking somehow they are taxing some greedy person somewhere far removed from themselves. What a joke! But, the joke is on you (and me). The tax and the joke are on you (and me)! Obama must be smiling.

Friday, April 17, 2009

The Beat Goes On

Citi and GE earnings are in and they are much better than consensus. The financial system is healing. Both Goldman and JP Morgan are anxious to repay TARP money and get the government out of its life. Big government has frightened investors away from the TALF, but, in the end, the TALF won't matter. The securitization market is beginning to show signs of life anyway. Housing is looking better for the first time in a while. All of this is very, very positive.

The big negative remains the Obama administration. Hopefully, the Congress will kill off card check, cap and trade, the health care nationalization scheme, and the massive tax hikes in the works. If much of this stuff survives, economic growth will be limited over the next decade or so. If most of this stuff is vaporized by a revolt of Democratic moderates, then a reasonably healthy recovery can take place starting as early as the Fall of this year.

Looking back, it is hard to not to see this as a brief but deep contraction in the economy. What kicked it off? Something that happened in September was undoubtedly the catalyst. Some say the Lehman bankruptcy...I would argue the extreme rhetoric of the Bush-Paulson-Bernanke campaign for TARP passage was the main catalyst. In any event, the recession did not begin in December 2007 as officially claimed. After all, the first two quarters of 2008 were both quarters of positive economic growth. Recessions are not slow growth periods. If that were the definition of a recession, then the term would be meaningless. The recession began in late September and early October of 2008 and will reach bottom this summer with recovery beginning this Fall.

What this means is that stocks are way, way too cheap, treasuries are way, way too expensive. Opportunities abound for investors. We will all look back on this period as one of extraordinary opportunity. This, of course, assumes that the Obama adminstration doesn't destroy the economy with its nightmare blueprint for the economy known as the "Obama budget." All bets are off if that budget passes. With the Obama budget, we will see a return to the 1970s ("Welcome back, Carter") -- high inflation, slow growth, laggard stock markets, high unemployment. Without the Obama budget, the US and the world economy have a bright future.

Monday, April 13, 2009

Goldman Knocks It Out of the Park

Goldman Sachs announced $ 3.39 per share earnings for the first quarter of 2009, eclipsing street estimates of $ 1.80. This was up from $ 3.23 per share in the first quarter of 2008. The earnings demonstrated the improvement in the credit markets during the early months of 2009, which proved to be the main source of the rip roaring quarter for mighty Goldman.

Goldman is trying to escape the clutches of Obama-Barney-Nancy-Chris. Goldman announced a $ 5 billion share offering, while sitting on $ 100 bililon in cash and near-cash in balance sheet assets. Paying back Uncle Sam would be easy, if only Uncle Sam would give permission. Not only did Paulson force Goldman to take the $ 10 billion in TARP money, now the government is withholding permission to Goldman to give the money bank. Welcome to the brave new world of free enterprise ala Bush-Obama.

The Bush-Obama stranglehold on our financial system is contributing to the overall malaise in the financial system. Wells Fargo would also like to pay back the TARP, but is getting refused by the government as well. Bank of America is in a similar position...ditto for JP Morgan.

It seems the government enjoys loaning money to large commercial banks. Wonder why? The banks don't want their money and would like to pay it back. Why, do you think, is Obama so insistent that the banks keep government money? Maybe economic recovery is not the real agenda here.

Saturday, April 11, 2009

Volcker Was Just For Show

Talk about good news and bad news! Here's the good news: Paul Volcker is an American hero. Almost singlehandedly, Volcker laid waste to a virulent bout of inflation that permeated the American economy throughout the 1970s, peaking at 14 percent in August of 1979. First appointed by Jimmy Carter in 1979 (reappointed by Ronald Reagan in 1983), Volcker had the courage and the foresight to lead the Federal Reserve to put on the monetary brakes. The price tag was high. Unemployment shot up to nearly eleven percent by late 1981, but Volcker succeeded, where others had failed, in breaking the back of the worst inflationary episode in American history. One could give Volcker much of the credit for setting the stage for the ensuing twenty years of prosperity that came on the heels of the Volcker heroics. Thus, the good news. Volcker is back. He was one of the first appointees in the new Obama administration as, with much fanfare, Obama named Volcker the head of a presidential advisory board to provide economic policy advice (to deal with the economic crisis) to the new administration.

Now comes the bad news. The so-called "presidential advisory board on economic policy" has never met and, no doubt, will never meet until long after Obama has completed his presidency. Volcker was just for show.

I wondered, in an earlier blog, how Volcker could stomach the extraordinary assault on fiscal integrity and the abandonment of standing contract law by the Obama administration. Now we know. A Wall Street Journal article appearing in Thursday's edition lays out the absence of input supplied by the legendary Volcker. He hasn't spoken with the President in over a month, as program after program, including the budget, the mortgage plan and the Geither plan to "fix the banks," have been unveiled. It is heartwarming to know that Volcker had no input in the these extraordinary adventures. When asked, the day before the Geithner plan was announced, what he expected, the Journal quotes Volcker as saying: "I have no idea what Tim's going to say." So much for the vaunted role of Paul Volcker.

This is an Adminstration that purports to reach out for advice, but fails to consult it's own policy advisors. For good reason, I suppose. There is simply no way Paul Volcker could provide an opinion supportive of the tragic economic policies of this administration. It's all about politics as usual.

Tuesday, April 7, 2009

TALF and the Treasury in the News

The TALF (Term Asset-Backed Securities Lending Facility) is a Federal Reserve Program that offers financing to the still-frozen asset backed securities markets, a market crucial to mortgage lending, auto finance, and credit card finance. This program was designed to provide nearly a trillion dollars of funding to jump start the ABS market. So far, $ 2 billion have been done. At this rate, the program will take fifty years to reach fruition! What went wrong? Answer: ? Yes, you guessed it -- Obama and the Congress. By insisting on punitive attacks on TARP recipients regarding executive compensation, the hiring on non-US employees, and entertainment and travel, Obama and the Congress have frightened away participants. TALF uses TARP money. That means anyone who participates may soon face the inquisition. No one wants to appear before Barney's committee and listen to his opinions on capitalism. We (and they) already know what he thinks of capitalism. Better to stay away from the TALF. Thanks Mr. President, thanks much for the TALF.

Today starts another avalanche of Treasury securities sales to finance the dreams of President Obama (and the nightmares of the business community). This week $ 58 billion in treasuries will be sold to an increasingly disbelieving set of buyers. A record $ 35 billion of three year notes will be sold on Wednesday with a $ 6 billion in 10 year TIPS today and $ 18 billion of ten year notes on Thursday. Whew! And this is just the beginning! A minimum of $ 2.5 trillion in treasuries is slated for sale this year -- three times more than has ever come to market in a single year in history. It is not clear that the credit rating of the US will survive this administration. Wonder what Plan B is when the market can no longer absorb the Obama debt landslide?

Monday, April 6, 2009

Stick to the Facts

Steven Gjerstad and Vernon Smith have added to the confusion surrounding the causes of the current financial crisis. In an interesting op-ed today in the Wall Street Journal, Gjerstad and Smith argue that the great crash of 1929-33 could not have been caused by monetary contraction because otherwise, as they put it in their article, "the massive injections of liquidity over the past 18 months should have averted the collapse of the financial market during this current crisis."

Sounds convincing doesn't it? Unfortunately, there were no "massive injections of liquidity" until fairly recently. The Fed finally injected significant liquidity into the economy starting in September of 2008, fairly late in the game and, by my arithmetic, roughly six months ago, not 18 months ago. Had there been "massive injections of liquidity" eighteen months ago, which would have been in the Fall of 2007, then Gjerstad and Smith could have a case. But, the facts are otherwise. Once again, the facts of this crisis fall victim to ideology.

Saturday, April 4, 2009

A Phony Debate

Did Greenspan's cause the current financial crisis by keeping the federal funds rate target too low for too long (2001-2003)? John Taylor has published a book recently taking Greenspan to task for precisely this. Is this a reasonable charge?

The Federal Reserve is one of many central banks around the world. The US is one of many short term borrowing markets around the world. There was a time, no doubt, when whatever happened in the US was the only thing that mattered to world economic variables. Not true anymore. The Fed can tinker around the edges, but the overall course of interest rates has nothing to do with the Federal Reserve. The decade of the 1970s serves as a permanent historical marker to the inability of the Federal Reserve to determine the course of interest rates, when market forces are pushing rates in a different direction. The idea that a central bank, any central bank, can make a minor adjustment to its balance sheet and thereby determine interest rates is silly.

Interest rates, even short ones, are determined by market forces. It isn't the Fed that pushed the overnight federal funds rate to zero last year. Funds traded at zero long before the Fed made its announced target rate change. In fact, the Fed has been behind the curve of the actual funds rate since the summer of 2007. They have lowered their target rate for federal funds repeatedly simply in an effort to catch up with the plunge in the actual market-determined federal funds rate. Something similar will happen on the way back up (which has already begun).

The Fed did not cause the financial crisis. That's a silly argument. There is a strong possibility that no one caused the current financial crisis! Yes! It is often the case that markets overshoot -- booms and busts do occur without their being some specific villain hiding behind the curtains pulling the strings. Why look for a villain? Looking for a villain leads to the wrong prescription for curing the crisis. Finding a villain and punishing him (or regulating him out of existence) is the wrong policy.

The right policy is to let the chips fall where they may. That way, market participants learn and future crises might not be so severe. The current policy teaches no lessons to market participants other than that bad behavior might be rewarded by misguided government policy (think TARP, Stimulus package, Mortgage relief, Fed guarantees, etc., etc.)

Markets go up and down, markets have booms and busts. They always have; they always will. That is why we are a wealthy and economically healthy society. Abolishing booms and busts may abolish the wealthy and healthy society as well.

Thursday, April 2, 2009

Enjoy The Rally -- There's More to Come

From a low of 6,547, set on March 9th, scarcely a month ago, the Dow Jones closed today at 7,978. That's a gain of nearly 22 percent off the bottom. Not bad for a single month!

What touched off this rally!

Begin with the Federal Reserve. The Fed has quadrupled its balance sheet and along the way created a surge in the monetary base. The Fed's announced decision to buy $ 300 billion in treasuries points to even higher growth in the monetary base down the road. Sooner or later, this explosion in the monetary base will translate into much higher money growth. Even in the short run, the monetary base expansion implies a huge boost to financial liquidity. The liquidity has to go somewhere. It won't go into new businesses. The Obama policies will see to that. Businessmen are petrified of the new administration and will refrain from taking any business risk with this administration's strident anti-business tone. Thus assets will receive a pop from this liquidity -- stocks first, then bonds, then raw land, and finally commodities generally. Unfortunately, not business. So, unemployment will grow and plateau at permanently higher levels. That is the inevitable result of the logic of the Obama Administration economic policy. Make employees toxic and they won't get hired (except by an ever expanding government).

What else? In late February, all of the major money center banks and the investment banks suggested that strong operating earnings will be reported for first quarter 2009. March was not as good as January and February we hear, but the numbers should still be better than most might have believed a few short months ago. If the financial system is producing very strong operating earnings, that is a good sign the economy is nowhere near as bad as the doom and gloom crowd think.

So, the rally will continue. Next stop 9,000!