Berkshire Hathaway has worst year in company's history, results show
By Alistair Barr, MarketWatch
Chairman Warren Buffett told shareholders Saturday that the economy would remain in "shambles" during 2009 and beyond, offering no prediction about the future may hold for U.S. stocks.
In his annual letter to shareholders -- eagerly anticipated by investors for the insights it may hold into his thinking -- Buffett said neither he nor Charlie Munger, his long-time partner in running Omaha-based Berkshire (BRKBBerkshire Hathaway Inc can predict winning and losing years in advance -- and no one else can either.
"We're certain, for example, that the economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond -- but that conclusion does not tell us whether the stock market will rise or fall," Buffett wrote.
Buffett, known as the "Oracle of Omaha," admitted to mistakes last year. "During 2008 I did some dumb things in investments," he said. One such error, he said, was the purchase of a large amount of Conoco Phillips Inc. stock when oil and gas prices were nearing peak levels.
"I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year," he said. "I still believe the odds are good that oil sells far higher in the future than the current $40-to-$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars."
Buffett also said his acquisition of shares in two Irish banks have turned out badly -- with losses of more than 89%.
On the positive side, the investor is pleased with buys totaling $14.5 million in fixed-income securities issued by General Electric Co.
We very much like these commitments, which carry high current yields that, in themselves, make the investments more than satisfactory. But in each of these three purchases, we also acquired a substantial equity participation as a bonus."
The per-share book value of both Class A and Class B shares of Berkshire fell 9.6%, Buffett said.
The company's net income fell to $4.99 billion from $13.21 billion in 2007.
The 78-year-old billionaire said that although the market value of bonds and stocks the company still holds have dropped dramatically along with the broader market, Berkshire is not bothered by those decreases. "Indeed, we enjoy such price declines if we have funds available to increase our positions. ... Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."
On the lookout for inflation 'Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.'
— Warren Buffett
Commenting on the federal government's actions to resolve the economic crisis, Buffett said: "Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects."
Inflation is likely to be one such effect, Buffett said.
"Moreover, major industries have become dependent on federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won't leave willingly."
Saturday, February 28, 2009
Government's Role?
Democratic leaders in Washington, they place their hope in the federal government. We place our hope in you, the American people. In the end, it comes down to an honest and fundamental disagreement about the proper role of government. We oppose the national Democratic view that says the way to strengthen our country is to increase dependence on government. We believe the way to strengthen our country is to restrain spending in Washington, to empower individuals and small businesses to grow our economy and create jobs." --Louisiana Gov. Bobby Jindal
Where are we going?
What is the economic model that we are turning to?
Expanded government control of private assets, production dictated to achieve political objectives, operations dictated by non-shareholders, conditions designed to produce failure and increased reliance upon public funding...
What is it?
It is an economic model in which the state dictates the utilization of privately held assets to achieve public policy goals.
That is the way we are heading.
Expanded government control of private assets, production dictated to achieve political objectives, operations dictated by non-shareholders, conditions designed to produce failure and increased reliance upon public funding...
What is it?
It is an economic model in which the state dictates the utilization of privately held assets to achieve public policy goals.
That is the way we are heading.
Insight: The flight of the long run
Historically...Bonds are doing better than equities for past 5, 10 and 25 years!
Need to rethink of our investing views.
***************
By Peter L. Bernstein
The “long run” used to be one of the most popular topics among investors, particularly institutional investors. In recent months, discussion of the long run has disappeared from view.
Indeed, the possibility the long run has run away is one of the few pieces of good news I have been able to find in the financial and economic turmoil of recent months.
The cold statistics have hardly been encouraging for the traditional view. On a total return basis, the Ibbotson data show that the S&P 500 has underperformed long-term Treasury bonds for the last five-year, 10-year, and 25-year periods, and by substantial amounts.
These data are not to be taken lightly.
If the long-run expected return on bonds in the future were higher than the expected return on equities, the capitalist system would grind to a halt, because the reward system would be completely out of whack with the risks involved. After all, from the end of 1949 to the end of 2000, the S&P 500 provided a total annual return of 13.1 per cent, while long Treasuries could grind out only 5.8 per cent a year.
But does this history really tell us anything about what lies ahead? Neither the awesome historical track record of equities nor the theoretical case is a promise of a realised equity risk premium. John Maynard Keynes, in an immortal observation about the future, expressed the matter in simple but obvious terms: “We simply do not know.”
Relying on the long run for investment decisions is essentially relying on trend lines. But how certain can we be that trends are destiny? Trends bend. Trends break. Today, in fact, we have no idea where any trend lines might begin or end, or even whether any trend lines still exist.
As Lord Keynes in one of his best known (and wisest) observations, reminded us: “The long run is a misleading guide to current affairs. Economists set themselves too easy, too useless a task if in the tempestuous seasons they only tell us that when the storm is past the ocean will be flat.” To Lord Keynes, the tempestuous seas are the norm. We cannot escape the short run.
There is an even deeper reason to reject the long run as a guide to future investment policy. The long-run results we can discern in the data of stock market history are not a random set of numbers: each event was the result of a preceding event rather than an independent observation. This is a statement of the highest importance. Any starting conditions we select in the historical data cannot replicate the starting conditions at any other moment because the preceding events in the two cases are never identical. There is no predestined rate of return. There is only an expected return that may not be realised.
Recent experience raises a different but perhaps an even more serious question relating to the long run. How do you frame a view of the long run from early 2009? The world has a ruptured financial system showing only fragile signs of recovery. The economic recession now encompasses the whole world. The speed of economic decline is without precedent. Government intervention is also without precedent, in its magnitude, depth, and complexity. Fiscal deficits are reaching numbers no one dreamed about even 12 months ago, yet they will have to be financed.
What kind of a long run is this mess going to produce? Was Bill Gross correct when he wrote for the December 2008 issue of Pimco’s Investment Outlook that “capitalism is and will remain a going concern, that risk-taking – over the long run – will be rewarded, but only from a starting price that correctly anticipates the economy’s growth and its share of after-tax corporate profits within it?”
Can capitalism remain “a going concern” after an extended period characterised by massive government intervention into the economy – and bail-outs of firms that would otherwise have failed? To what extent will the “going” in Mr Gross’s vision be tied to government intervention in these forms and magnitude? Or is Mr Gross’s optimism justified? Will we be able to unwind the role of government in the capitalist system as we know it and go back to the status quo ante?
Will our economy and society emerge so risk-averse after these experiences that years will have to pass before we return to a system naturally generating vibrant economic growth and a renewed willingness to both borrow and lend? Or will we head in the opposite direction, where faith in ultimate bail-outs will justify the wildest kind of risk-taking? Or will the entire structure collapse from government debts and deficits that turn out to be so unmanageable that chaos is the ultimate result?
We can neither answer those questions nor can we claim they are a complete list of the possibilities. The unknown today seems more than usually unknown. Then my whole point remains the same. The long run is an impenetrable mystery. It always has been.
Peter L Bernstein is the founder and president of Peter L Bernstein Inc, economic consultants, and author of 10 books on economics and finance.
Copyright The Financial Times Limited 2009
Need to rethink of our investing views.
***************
By Peter L. Bernstein
The “long run” used to be one of the most popular topics among investors, particularly institutional investors. In recent months, discussion of the long run has disappeared from view.
Indeed, the possibility the long run has run away is one of the few pieces of good news I have been able to find in the financial and economic turmoil of recent months.
The cold statistics have hardly been encouraging for the traditional view. On a total return basis, the Ibbotson data show that the S&P 500 has underperformed long-term Treasury bonds for the last five-year, 10-year, and 25-year periods, and by substantial amounts.
These data are not to be taken lightly.
If the long-run expected return on bonds in the future were higher than the expected return on equities, the capitalist system would grind to a halt, because the reward system would be completely out of whack with the risks involved. After all, from the end of 1949 to the end of 2000, the S&P 500 provided a total annual return of 13.1 per cent, while long Treasuries could grind out only 5.8 per cent a year.
But does this history really tell us anything about what lies ahead? Neither the awesome historical track record of equities nor the theoretical case is a promise of a realised equity risk premium. John Maynard Keynes, in an immortal observation about the future, expressed the matter in simple but obvious terms: “We simply do not know.”
Relying on the long run for investment decisions is essentially relying on trend lines. But how certain can we be that trends are destiny? Trends bend. Trends break. Today, in fact, we have no idea where any trend lines might begin or end, or even whether any trend lines still exist.
As Lord Keynes in one of his best known (and wisest) observations, reminded us: “The long run is a misleading guide to current affairs. Economists set themselves too easy, too useless a task if in the tempestuous seasons they only tell us that when the storm is past the ocean will be flat.” To Lord Keynes, the tempestuous seas are the norm. We cannot escape the short run.
There is an even deeper reason to reject the long run as a guide to future investment policy. The long-run results we can discern in the data of stock market history are not a random set of numbers: each event was the result of a preceding event rather than an independent observation. This is a statement of the highest importance. Any starting conditions we select in the historical data cannot replicate the starting conditions at any other moment because the preceding events in the two cases are never identical. There is no predestined rate of return. There is only an expected return that may not be realised.
Recent experience raises a different but perhaps an even more serious question relating to the long run. How do you frame a view of the long run from early 2009? The world has a ruptured financial system showing only fragile signs of recovery. The economic recession now encompasses the whole world. The speed of economic decline is without precedent. Government intervention is also without precedent, in its magnitude, depth, and complexity. Fiscal deficits are reaching numbers no one dreamed about even 12 months ago, yet they will have to be financed.
What kind of a long run is this mess going to produce? Was Bill Gross correct when he wrote for the December 2008 issue of Pimco’s Investment Outlook that “capitalism is and will remain a going concern, that risk-taking – over the long run – will be rewarded, but only from a starting price that correctly anticipates the economy’s growth and its share of after-tax corporate profits within it?”
Can capitalism remain “a going concern” after an extended period characterised by massive government intervention into the economy – and bail-outs of firms that would otherwise have failed? To what extent will the “going” in Mr Gross’s vision be tied to government intervention in these forms and magnitude? Or is Mr Gross’s optimism justified? Will we be able to unwind the role of government in the capitalist system as we know it and go back to the status quo ante?
Will our economy and society emerge so risk-averse after these experiences that years will have to pass before we return to a system naturally generating vibrant economic growth and a renewed willingness to both borrow and lend? Or will we head in the opposite direction, where faith in ultimate bail-outs will justify the wildest kind of risk-taking? Or will the entire structure collapse from government debts and deficits that turn out to be so unmanageable that chaos is the ultimate result?
We can neither answer those questions nor can we claim they are a complete list of the possibilities. The unknown today seems more than usually unknown. Then my whole point remains the same. The long run is an impenetrable mystery. It always has been.
Peter L Bernstein is the founder and president of Peter L Bernstein Inc, economic consultants, and author of 10 books on economics and finance.
Copyright The Financial Times Limited 2009
Friday, February 27, 2009
Thursday, February 26, 2009
The Speed of Trust
Trust is pretty well gone, done and over with, as a result, the economic system is slowing down, and slowing down fast.
*******************
By Adrienne Toghraie
Most are familiar with Stephen Covey’s now classic book, The Seven Habits of Highly Effective People. In that book, Covey wrote about his son, also named Stephen Covey, who has written a wonderful and equally important book, The Speed of Trust. In this book, the younger Covey discusses the fact that trust is essentially the lubricant that moves individuals, organizations and societies forward. Without it, everything slows down:
If I cannot believe what you say, I will need to take the time to verify it.
When everyone along the line has to verify, the machinery grinds to a halt.
This is what is happening now in the US economy. One after another, the people and institutions we trust to manage our money by employing the principles of honesty, integrity, and strict fiduciary guidelines established by law, the Bernie Madoffs who exemplified those qualities, have sidestepped those principles in the name of pride, greed, and expediency. The entire system of credit ultimately depends upon trust; and without trust, the system has crumbled.
But, the problem has gone deeper than merely our financial institutions. A growing cadre of the elected officials we entrusted with the responsibility to lead us, to make our laws and ensure their enforcement, to use our tax money to protect and support us and to protect our constitution and its implementation, have broken that trust. They have been caught hiding bribe money in the refrigerator, selling congressional positions to the highest bidder, and just about every nefarious and illegal act imaginable.
We have even learned to distrust the source of our food supply. Foodstuff from foreign sources that do not adhere to our safety requirements has infiltrated our system. Lethal E-coli bacteria and salmonella infected countless citizens. Shortcuts taken in the raising, production, and processing of our food have led to the contamination of our basic necessities of life.
People have started looking around and asking themselves, “Whom can we trust?”
What does all of this have to do with making money in the markets? The gears that drive a investment are greased with trust.
What about those annual reports? On the basis of the financial statements made by a company’s top executives and signed off by their lawyers and accountants will determine the investment decisions made by investors who do not have the resources to personally investigate the financial condition of each and every company on the exchange. Regardless of how deep or shallow the pockets are of those who are making investment and trading decisions, lives will be seriously and adversely affected if the accounting firm that signs off on the audit is being paid generously to cook the books. When you discover the ruse, you lose trust. You are then forced to stop and reconsider your entire investing strategy.
Suppose you discover that the single most important source of information about the markets can no longer be trusted, what do you do? Where do you go for the information vital to your decision-making? For many loyal readers, their major city newspaper’s imprimatur on a story was the very guarantee of authenticity. Then, in recent times, stories began to circulate about the lack of fact-checking and editorial rigor and of political and personal bias that colored reporting and pushed politically embarrassing stories to the back of the paper or simply off the radar. The result has been a decline in readership due, in part, to a lack of trust. In the news business, trust is the coin of the realm. One major newspaper in the US that is not experiencing a decline in readership is the most trusted source for business news, The Wall Street Journal (and no, this is not an advertisement for TWSJ). But, just suppose that you could no longer depend upon it?
The speed of trust goes all the way down to the people who clean your offices at night. If you cannot trust them not to go through your files, hack into your computer or steal the money in your desk drawer, you will be forced to clean your own offices after work hours.
As we watch in amazement at how rapidly the speed of trust is slowing down, we ask ourselves if there is a way back out of this mess. The answer is yes. It starts with each of us showing the people around us that our word is unimpeachable, that we are willing to do what we promise to do, that we are following the rules (our own rules as well) and that we can be trusted. Then, we can rightfully demand the same from those upon whom we depend. Reagan said it well so long ago: trust but verify.
Each and every one of us is hurt by the broken trust of one of our colleagues. Our profession is smeared with the same brush. We can, however, restart the speed of trust by raising the bar, by expecting and demanding more trustworthiness, and by verifying that we are getting it. If we do not do this, if we simply wring our hands in dismay, we will not be able to get the machinery back up and running. And we must do this across the board. We need to hold our elected officials accountable and let them know that government by the wink-wink-nod-nod process of governance is not acceptable and we will not allow the game to be played by those rules. The trillions of dollars being borrowed from our children and grandchildren to “jump start” the economy cannot be distributed like a shell game or we will all be the losers as trust further erodes and, instead of being jump started, the economy will lay down and slip into unconsciousness.
*******************
By Adrienne Toghraie
Most are familiar with Stephen Covey’s now classic book, The Seven Habits of Highly Effective People. In that book, Covey wrote about his son, also named Stephen Covey, who has written a wonderful and equally important book, The Speed of Trust. In this book, the younger Covey discusses the fact that trust is essentially the lubricant that moves individuals, organizations and societies forward. Without it, everything slows down:
If I cannot believe what you say, I will need to take the time to verify it.
When everyone along the line has to verify, the machinery grinds to a halt.
This is what is happening now in the US economy. One after another, the people and institutions we trust to manage our money by employing the principles of honesty, integrity, and strict fiduciary guidelines established by law, the Bernie Madoffs who exemplified those qualities, have sidestepped those principles in the name of pride, greed, and expediency. The entire system of credit ultimately depends upon trust; and without trust, the system has crumbled.
But, the problem has gone deeper than merely our financial institutions. A growing cadre of the elected officials we entrusted with the responsibility to lead us, to make our laws and ensure their enforcement, to use our tax money to protect and support us and to protect our constitution and its implementation, have broken that trust. They have been caught hiding bribe money in the refrigerator, selling congressional positions to the highest bidder, and just about every nefarious and illegal act imaginable.
We have even learned to distrust the source of our food supply. Foodstuff from foreign sources that do not adhere to our safety requirements has infiltrated our system. Lethal E-coli bacteria and salmonella infected countless citizens. Shortcuts taken in the raising, production, and processing of our food have led to the contamination of our basic necessities of life.
People have started looking around and asking themselves, “Whom can we trust?”
What does all of this have to do with making money in the markets? The gears that drive a investment are greased with trust.
What about those annual reports? On the basis of the financial statements made by a company’s top executives and signed off by their lawyers and accountants will determine the investment decisions made by investors who do not have the resources to personally investigate the financial condition of each and every company on the exchange. Regardless of how deep or shallow the pockets are of those who are making investment and trading decisions, lives will be seriously and adversely affected if the accounting firm that signs off on the audit is being paid generously to cook the books. When you discover the ruse, you lose trust. You are then forced to stop and reconsider your entire investing strategy.
Suppose you discover that the single most important source of information about the markets can no longer be trusted, what do you do? Where do you go for the information vital to your decision-making? For many loyal readers, their major city newspaper’s imprimatur on a story was the very guarantee of authenticity. Then, in recent times, stories began to circulate about the lack of fact-checking and editorial rigor and of political and personal bias that colored reporting and pushed politically embarrassing stories to the back of the paper or simply off the radar. The result has been a decline in readership due, in part, to a lack of trust. In the news business, trust is the coin of the realm. One major newspaper in the US that is not experiencing a decline in readership is the most trusted source for business news, The Wall Street Journal (and no, this is not an advertisement for TWSJ). But, just suppose that you could no longer depend upon it?
The speed of trust goes all the way down to the people who clean your offices at night. If you cannot trust them not to go through your files, hack into your computer or steal the money in your desk drawer, you will be forced to clean your own offices after work hours.
As we watch in amazement at how rapidly the speed of trust is slowing down, we ask ourselves if there is a way back out of this mess. The answer is yes. It starts with each of us showing the people around us that our word is unimpeachable, that we are willing to do what we promise to do, that we are following the rules (our own rules as well) and that we can be trusted. Then, we can rightfully demand the same from those upon whom we depend. Reagan said it well so long ago: trust but verify.
Each and every one of us is hurt by the broken trust of one of our colleagues. Our profession is smeared with the same brush. We can, however, restart the speed of trust by raising the bar, by expecting and demanding more trustworthiness, and by verifying that we are getting it. If we do not do this, if we simply wring our hands in dismay, we will not be able to get the machinery back up and running. And we must do this across the board. We need to hold our elected officials accountable and let them know that government by the wink-wink-nod-nod process of governance is not acceptable and we will not allow the game to be played by those rules. The trillions of dollars being borrowed from our children and grandchildren to “jump start” the economy cannot be distributed like a shell game or we will all be the losers as trust further erodes and, instead of being jump started, the economy will lay down and slip into unconsciousness.
The Risk in Europe
Europe and the Euro are in trouble
*************************
By John Mauldin - Feb 20, 2009
I mentioned last week that European banks are at significant risk. I want to follow up on that point, as it is very important. Eastern Europe has borrowed an estimated $1.7 trillion, primarily from Western European banks. And much of Eastern Europe is already in a deep recession bordering on depression. A great deal of that $1.7 trillion is at risk, especially the portion that is in Swiss francs. It is a story that could easily be as big as the US subprime problem.
In Poland, as an example, 60% of mortgages are in Swiss francs. When times are good and currencies are stable, it is nice to have a low-interest Swiss mortgage. And as a requirement for joining the euro currency union, Poland has been required to keep its currency stable against the euro. This gave borrowers comfort that they could borrow at low interest in francs or euros, rather than at much higher local rates.
But in an echo of teaser-rate subprimes here in the US, there is a problem. Along came the synchronized global recession and large Polish current-account trade deficits, which were three times those of the US in terms of GDP, just to give us some perspective. Of course, if you are not a reserve currency this is going to bring some pressure to bear. And it did. The Polish zloty has basically dropped in half compared to the Swiss franc. That means if you are a mortgage holder, your house payment just doubled. That same story is repeated all over the Baltics and Eastern Europe.
Austrian banks have lent $289 billion (230 billion euros) to Eastern Europe. That is 70% of Austrian GDP. Much of it is in Swiss francs they borrowed from Swiss banks. Even a 10% impairment (highly optimistic) would bankrupt the Austrian financial system, says the Austrian finance minister, Joseph Proll. In the US we speak of banks that are too big to be allowed to fail. But the reality is that we could nationalize them if we needed to do so. (And for the record, I favor nationalization and swift privatization. We cannot afford a repeat of Japan's zombie banks.)
The problem is that in Europe there are many banks that are simply too big to save. The size of the banks in terms of the GDP of the country in which they are domiciled is all out of proportion. For my American readers, it would be as if the bank bailout package were in excess of $14 trillion (give or take a few trillion). In essence, there are small countries which have very large banks (relatively speaking) that have gone outside their own borders to make loans and have done so at levels of leverage which are far in excess of the most leveraged US banks. The ability of the "host" countries to nationalize their banks is simply not there. They are going to have to have help from larger countries. But as we will see below, that help is problematical.
Western European banks have been very aggressive in lending to emerging market countries worldwide. Almost 75% of an estimated $4.9 trillion of loans outstanding are to countries that are in deep recessions. Plus, according to the IMF, they are 50% more leveraged than US banks.
Today the euro rallied back to $1.26 based upon statements from German authorities that were interpreted as a potential willingness to help out non-German (in particular, Austrian) banks.
However, this more sobering note from Strategic Energy was sent to me by a reader. It nicely sums up my concerns:
"It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, told me the region may need €400bn in help to cover loans and prop up the credit system. Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.
"The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan -- and Turkey next -- and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16bn rescue of Ukraine has unravelled. The country -- facing a 12% contraction in GDP after the collapse of steel prices -- is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5% in the fourth quarter. Protesters have smashed the treasury and stormed parliament.
"'This is much worse than the East Asia crisis in the 1990s,' said Lars Christensen, at Danske Bank. 'There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU.' Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4% in the fourth quarter. If Deutsche Bank is correct, the economy will have shrunk by nearly 9% before the end of this year. This is the sort of level that stokes popular revolt.
"The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc -- big change), or rescue Austria from its Habsburg adventurism. So we watch and wait as the lethal brush fires move closer. If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?"
While Rome Burns
I hope the writer is wrong. But the ECB is dithering while Rome burns. (Or at least their banking system is -- Italy's banks have large exposure to Eastern Europe through Austrian subsidiaries.) They need to bring rates down and figure out how to move into quantitative easing. Europe is at far greater risk than the US.
Great Britain and Europe as a whole are down about 6% in GDP on an annualized basis. The Bank Credit Analyst sent the next graph out to their public list, and I reproduce it here. (www.bcaresearch.com) In another longer report, they note that the UK, Ireland, Denmark, and Switzerland have the greatest risk of widespread bank nationalization (outside of Iceland). The full report is quite sobering. The countries on the bottom of the list are also in danger of having their credit ratings downgraded.
Aggregate Sovereign Credit Risk
This has the potential to be a real crisis, far worse than in the US. Without concerted action on the part of the ECB and the European countries that are relatively strong, much of Europe could fall further into what would feel like a depression. There is a problem, though. Imagine being a politician in Germany, for instance. Your GDP is down by 8% last quarter. Unemployment is rising. Budgets are under pressure, as tax collections are down. And you are going to be asked to vote in favor of bailing out (pick a small country)? What will the voters who put you into office think?
We are going to find out this year whether the European Union is like the Three Musketeers. Are they "all for one and one for all?" or is it every country for itself? My bet (or hope) is that it is the former. Dissolution at this point would be devastating for all concerned, and for the world economy at large. Many of us in the US don't think much about Europe or the rest of the world, but without a healthy Europe, much of our world trade would vanish.
However, getting all the parties to agree on what to do will take some serious leadership, which does not seem to be in evidence at this point. The US almost waited too long to respond to our crisis, but we had the "luxury" of only needing to get a few people to agree as to the nature of the problems (whether they were wrong or right is beside the point). And we have a central bank that could act decisively.
As I understand the European agreement, that situation does not exist in Europe. For the ECB to print money as the US and the UK (and much of the non-EU developed world) will do, takes agreement from all the member countries, and right now it appears the German and Dutch governments are resisting such an idea.
As I write this (on a plane on my way to Orlando) German finance minister Peer Steinbruck has said it would be intolerable to let fellow EMU members fall victim to the global financial crisis. "We have a number of countries in the eurozone that are clearly getting into trouble on their payments," he said. "Ireland is in a very difficult situation.
"The euro-region treaties don't foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty."
That is a hopeful sign. Ireland is indeed in dire straits, and is particularly vulnerable as it is going to have to spend a serious percentage of its GDP on bailing out its banks.
It is not clear how it will all play out. But there is real risk of Europe dragging the world into a longer, darker night. Their banks not only have exposure to our US foibles, much of which has already been written off, but now many banks will have to contend with massive losses from emerging-market loans, which could be even larger than the losses stemming from US problems. Plus, they are more leveraged. (This was definitely a topic of "Conversation" this morning when I chatted with Nouriel Roubini. See more below.)
The Euro Back to Parity? Really?
I wrote over six years ago, when the euro was below $1, that I thought the euro would rise to over $1.50 (it went even higher) and then back to parity in the middle of the next decade. I thought the decline would be due to large European government deficits brought about by pension and health care promises to retirees, and those problems do still loom.
It may be that the current problems will push the euro to parity much sooner, possibly this year. While that will be nice if you want to vacation in Europe, it will have serious side effects on international trade. It clearly makes European exporters more competitive with the rest of the world, and especially the US. It also means that goods coming from Asia will cost more in Europe, unless Asian countries decide to devalue their currencies to maintain an ability to sell into Europe, which of course will bring howls from the US about currency manipulation. It is going to put pressure on governments to enact some form of trade protectionism, which would be devastating to the world economy.
Large and swift currency swings are inherently disruptive. We are seeing volatility in the currency markets unlike anything I have witnessed. I hope we do not see a precipitous fall in value of the euro. It will be good for no one. It is a strange world indeed when the US is having such a deep series of problems, the Fed and Treasury are talking about printing a few trillion here and a few trillion there, and at the very same time we see the dollar AND gold rising in value. Which all serves as a good set-up to the next section.
***********
John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore
*************************
By John Mauldin - Feb 20, 2009
I mentioned last week that European banks are at significant risk. I want to follow up on that point, as it is very important. Eastern Europe has borrowed an estimated $1.7 trillion, primarily from Western European banks. And much of Eastern Europe is already in a deep recession bordering on depression. A great deal of that $1.7 trillion is at risk, especially the portion that is in Swiss francs. It is a story that could easily be as big as the US subprime problem.
In Poland, as an example, 60% of mortgages are in Swiss francs. When times are good and currencies are stable, it is nice to have a low-interest Swiss mortgage. And as a requirement for joining the euro currency union, Poland has been required to keep its currency stable against the euro. This gave borrowers comfort that they could borrow at low interest in francs or euros, rather than at much higher local rates.
But in an echo of teaser-rate subprimes here in the US, there is a problem. Along came the synchronized global recession and large Polish current-account trade deficits, which were three times those of the US in terms of GDP, just to give us some perspective. Of course, if you are not a reserve currency this is going to bring some pressure to bear. And it did. The Polish zloty has basically dropped in half compared to the Swiss franc. That means if you are a mortgage holder, your house payment just doubled. That same story is repeated all over the Baltics and Eastern Europe.
Austrian banks have lent $289 billion (230 billion euros) to Eastern Europe. That is 70% of Austrian GDP. Much of it is in Swiss francs they borrowed from Swiss banks. Even a 10% impairment (highly optimistic) would bankrupt the Austrian financial system, says the Austrian finance minister, Joseph Proll. In the US we speak of banks that are too big to be allowed to fail. But the reality is that we could nationalize them if we needed to do so. (And for the record, I favor nationalization and swift privatization. We cannot afford a repeat of Japan's zombie banks.)
The problem is that in Europe there are many banks that are simply too big to save. The size of the banks in terms of the GDP of the country in which they are domiciled is all out of proportion. For my American readers, it would be as if the bank bailout package were in excess of $14 trillion (give or take a few trillion). In essence, there are small countries which have very large banks (relatively speaking) that have gone outside their own borders to make loans and have done so at levels of leverage which are far in excess of the most leveraged US banks. The ability of the "host" countries to nationalize their banks is simply not there. They are going to have to have help from larger countries. But as we will see below, that help is problematical.
Western European banks have been very aggressive in lending to emerging market countries worldwide. Almost 75% of an estimated $4.9 trillion of loans outstanding are to countries that are in deep recessions. Plus, according to the IMF, they are 50% more leveraged than US banks.
Today the euro rallied back to $1.26 based upon statements from German authorities that were interpreted as a potential willingness to help out non-German (in particular, Austrian) banks.
However, this more sobering note from Strategic Energy was sent to me by a reader. It nicely sums up my concerns:
"It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, told me the region may need €400bn in help to cover loans and prop up the credit system. Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.
"The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan -- and Turkey next -- and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16bn rescue of Ukraine has unravelled. The country -- facing a 12% contraction in GDP after the collapse of steel prices -- is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5% in the fourth quarter. Protesters have smashed the treasury and stormed parliament.
"'This is much worse than the East Asia crisis in the 1990s,' said Lars Christensen, at Danske Bank. 'There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU.' Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4% in the fourth quarter. If Deutsche Bank is correct, the economy will have shrunk by nearly 9% before the end of this year. This is the sort of level that stokes popular revolt.
"The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc -- big change), or rescue Austria from its Habsburg adventurism. So we watch and wait as the lethal brush fires move closer. If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?"
While Rome Burns
I hope the writer is wrong. But the ECB is dithering while Rome burns. (Or at least their banking system is -- Italy's banks have large exposure to Eastern Europe through Austrian subsidiaries.) They need to bring rates down and figure out how to move into quantitative easing. Europe is at far greater risk than the US.
Great Britain and Europe as a whole are down about 6% in GDP on an annualized basis. The Bank Credit Analyst sent the next graph out to their public list, and I reproduce it here. (www.bcaresearch.com) In another longer report, they note that the UK, Ireland, Denmark, and Switzerland have the greatest risk of widespread bank nationalization (outside of Iceland). The full report is quite sobering. The countries on the bottom of the list are also in danger of having their credit ratings downgraded.
Aggregate Sovereign Credit Risk
This has the potential to be a real crisis, far worse than in the US. Without concerted action on the part of the ECB and the European countries that are relatively strong, much of Europe could fall further into what would feel like a depression. There is a problem, though. Imagine being a politician in Germany, for instance. Your GDP is down by 8% last quarter. Unemployment is rising. Budgets are under pressure, as tax collections are down. And you are going to be asked to vote in favor of bailing out (pick a small country)? What will the voters who put you into office think?
We are going to find out this year whether the European Union is like the Three Musketeers. Are they "all for one and one for all?" or is it every country for itself? My bet (or hope) is that it is the former. Dissolution at this point would be devastating for all concerned, and for the world economy at large. Many of us in the US don't think much about Europe or the rest of the world, but without a healthy Europe, much of our world trade would vanish.
However, getting all the parties to agree on what to do will take some serious leadership, which does not seem to be in evidence at this point. The US almost waited too long to respond to our crisis, but we had the "luxury" of only needing to get a few people to agree as to the nature of the problems (whether they were wrong or right is beside the point). And we have a central bank that could act decisively.
As I understand the European agreement, that situation does not exist in Europe. For the ECB to print money as the US and the UK (and much of the non-EU developed world) will do, takes agreement from all the member countries, and right now it appears the German and Dutch governments are resisting such an idea.
As I write this (on a plane on my way to Orlando) German finance minister Peer Steinbruck has said it would be intolerable to let fellow EMU members fall victim to the global financial crisis. "We have a number of countries in the eurozone that are clearly getting into trouble on their payments," he said. "Ireland is in a very difficult situation.
"The euro-region treaties don't foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty."
That is a hopeful sign. Ireland is indeed in dire straits, and is particularly vulnerable as it is going to have to spend a serious percentage of its GDP on bailing out its banks.
It is not clear how it will all play out. But there is real risk of Europe dragging the world into a longer, darker night. Their banks not only have exposure to our US foibles, much of which has already been written off, but now many banks will have to contend with massive losses from emerging-market loans, which could be even larger than the losses stemming from US problems. Plus, they are more leveraged. (This was definitely a topic of "Conversation" this morning when I chatted with Nouriel Roubini. See more below.)
The Euro Back to Parity? Really?
I wrote over six years ago, when the euro was below $1, that I thought the euro would rise to over $1.50 (it went even higher) and then back to parity in the middle of the next decade. I thought the decline would be due to large European government deficits brought about by pension and health care promises to retirees, and those problems do still loom.
It may be that the current problems will push the euro to parity much sooner, possibly this year. While that will be nice if you want to vacation in Europe, it will have serious side effects on international trade. It clearly makes European exporters more competitive with the rest of the world, and especially the US. It also means that goods coming from Asia will cost more in Europe, unless Asian countries decide to devalue their currencies to maintain an ability to sell into Europe, which of course will bring howls from the US about currency manipulation. It is going to put pressure on governments to enact some form of trade protectionism, which would be devastating to the world economy.
Large and swift currency swings are inherently disruptive. We are seeing volatility in the currency markets unlike anything I have witnessed. I hope we do not see a precipitous fall in value of the euro. It will be good for no one. It is a strange world indeed when the US is having such a deep series of problems, the Fed and Treasury are talking about printing a few trillion here and a few trillion there, and at the very same time we see the dollar AND gold rising in value. Which all serves as a good set-up to the next section.
***********
John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore
Wednesday, February 25, 2009
Some Detail...as to what needs to be done
[This is the first in a series of articles that seeks to provide the intelligent layman with sufficient knowledge of sound economic theory to enable him to understand what must be done to overcome the present financial crisis and return to the path of economic progress and prosperity.]
A disastrous economic confusion, one that is shared almost universally, both by laymen and by professional economists alike, is the belief that falling prices constitute deflation and thus must be feared and, if possible, prevented.
The front-page, lead article of The New York Times of last November 1 provides a typical example of this confusion. It declares:
As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy — the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years.
The word for this is deflation, or declining prices, a term that gives economists chills.
Deflation accompanied the Depression of the 1930s. Persistently falling prices also were at the heart of Japan's so-called lost decade after the catastrophic collapse of its real estate bubble at the end of the 1980s — a period in which some experts now find parallels to the American predicament.
Contrary to The Times and so many others, deflation is not falling prices but a decrease in the quantity of money and/or volume of spending in the economic system. To say the same thing in different words, deflation is a general fall in demand. Falling prices are a consequence of deflation, not the phenomenon itself.
Totally apart from deflation, falling prices are also a consequence of increases in the production and supply of goods, which are an essential feature of economic progress and a rising standard of living. In such circumstances, falling prices are not accompanied by any plunge in business sales revenues or profits, by any increase in the difficulty of repaying debt, or by any surge in bankruptcies. All of these phenomena are the result purely and simply of deflation, not falling prices.
Indeed, under a full-bodied, 100-percent-reserve gold standard, falling prices, caused by increased production, are likely to be accompanied by a modest elevation of the rate of profit and a somewhat greater ease of repaying debt, both owing to the increase in the production and supply of gold and thus in the spending of gold. Under such a gold standard, prices fall to the extent that the increase in the production and supply of ordinary goods and services outstrips the increase in the production and supply of gold and the consequent increase in spending in terms of gold.
While this must certainly come as a surprise to The Times, and to everyone else who does not understand the nature of deflation, falling prices are in fact so far removed from being deflation that they are the antidote to deflation. They are what enables an economic system that has experienced deflation to recover from it and thereafter to enjoy the fruits of economic progress.
This conclusion can be demonstrated Socratically, by means of a simple question that could be used on an economics exam for sixth graders.
Thus, imagine that prior to the present financial downturn, Bill used to go shopping once a week in his local supermarket. When he went there, he could afford to spend $10 for bottled water. At the prevailing price of $1 per bottle, he was able to buy 10 bottles. Now, in the midst of the downturn, when Bill visits the supermarket, he can afford to spend only $5 for bottled water.
Here's the question: At what price per bottle of water would Bill be able to buy for $5 the 10 bottles of water he used to buy for $10? Answer: 50¢.
As this question and its answer make clear, a fall in prices enables reduced funds available for expenditure to buy as much as previously larger funds could buy.
This point applies even when lower prices do not result in greater purchases of the particular item whose price has fallen. Thus, suppose that the price of a gallon of milk is $8 and now falls to $4. Yet Bill and his family do not need more than one gallon in any given week, and so won't buy any larger quantity of milk at its now lower price. The fall in its price still helps economic recovery. It does so by freeing up $4 of Bill's funds to make possible the purchase of other things, that he wants but otherwise couldn't afford because of the lack of available funds.
Another, similar example is that of a fall in the price of gasoline or heating oil, which helps to increase the ability of people to spend in buying products throughout the economic system.
As indicated, in sharpest contrast to falling prices, deflation is a process of financial contraction. In our present crisis, it is a contraction of credit and of the spending that depends on credit. A fall in prices and, of course, in wage rates too, is the essential means of adapting to this deflation and overcoming it.
Nevertheless, the prevailing bizarre confusion of falling prices with deflation, stands in the way of economic recovery. In regarding falling prices, which are the effect of deflation and at the same time the remedy for deflation, as somehow themselves being deflation, people are led to confuse the solution for the problem with the problem that needs to be solved.
On the basis of this confusion, they advocate government intervention to prevent prices from falling. The prices they want to prevent from falling are, variously, house prices, farm and other commodity prices, and, above all, wage rates. To the extent that such efforts are successful, and prices are prevented from falling, the effect is to prevent economic recovery. It prevents economic recovery by preventing the reduced level of spending that deflation represents, from buying the larger quantity of goods and services that it would be able to buy at lower prices and wage rates.
Just as falling prices are so far from being deflation that they are the remedy for deflation, so too preventing prices from falling is so far from preventing deflation that it actually worsens the deflation. This is because it leads people to postpone buying even in instances in which they have the ability to buy. They put off buying in the expectation of being able to buy on better terms later on, when prices and wage rates have fallen to the extent necessary to permit economic recovery.
By the same token, when prices and wage rates finally do fall sufficiently to permit economic recovery, an increase in spending in the economic system will almost certainly occur. This is because the funds that people had been withholding from spending, awaiting the fall in prices and wages rates, will now, in the face of the necessary fall, be spent. Thus the necessary fall in prices and wage rates achieves economic recovery by means of creating greater buying power for a reduced amount of spending. It also brings about a partial restoration of spending and thereby definitively ends the deflation.
Just how far it is necessary for prices and wage rates to fall in order to achieve economic recovery depends on the change that has taken place in what Mises calls "the money relation." This is the relationship between the supply of money and the demand for money for holding.
During the boom, inflation and credit expansion increase the supply of money and at the same time reduce the demand for money for holding. Then, in the subsequent bust phase of the business cycle, the demand for money for holding rises and the supply of money can actually fall. Both of these factors make for a decline in total spending in the economic system and thus the need for a correspondingly lower level of wage rates and prices to achieve economic recovery.
How far these processes might go in our present circumstances and what might be done, consistent with the principle of economic freedom, to mitigate them, is too large a subject to explain in this one article.[1] However, I must state here that a decrease in the quantity of money can be altogether prevented and that this would dramatically limit the extent of the decline in overall spending in the economic system.
Whatever the reduced levels of spending that the changed money relation will support, the freedom of wage rates and prices to fall can achieve not only economic recovery but more than economic recovery. It can achieve the employment of everyone able and willing to work, i.e., full employment. And it could do so with no decline in the real wages of the average worker in the economic system, indeed, with a significant rise in his real wages. Unfortunately, this too is a subject too large to discuss further in the present article.[2]
Bailouts
Before closing, I must say a few words about the present efforts of the government to overcome the crisis by means of "bailouts" and their associated financing by budget deficits. Ultimately, these efforts are an attempt to overcome the effects of a rise in the demand for money for holding by means of a sufficiently large increase in the supply of money. In its campaign, the government appears to care for nothing but overcoming the crisis of the moment, without regard to the fuel it is providing for the next crisis.
The government today has unlimited powers of money creation. And so it is highly likely, given its evident willingness to use those powers, and the overwhelming public support that exists for using them, that the increase in the supply of money it brings about will ultimately outweigh the present increase in the public's demand for money for holding. When and to the extent that that happens, and business sales revenues and profits begin to rise and employment and wage rates begin to rise, the public's demand for money for holding will once again begin to fall.
At that point the massive increase in the quantity of money the government is currently bringing about will fuel sharply rising prices and give birth to a new crisis. This time, a crisis of inflation. Then, the government will either have to be content with a US economy that resembles the economic system of a Latin American country or it will have to rein in its inflation. If it chooses the latter quickly, we'll be back to the situation that prevailed in the early 1980s and have to undergo a fresh economic contraction, though probably one of much greater size than then, because of the unfinished business left over from the present crisis.
If the government delays too long in reining in its inflation, then when it finally does decide to do so, it may be confronted not only with prices rising as rapidly as they did in Latin America decades ago, but also with the massive unemployment rates that accompanied the efforts to rein in such major inflation. At that time, prices rising at a rate of 20, 30, or 50 percent or more were accompanied by comparably high unemployment rates. (To understand how such a thing can happen, imagine total spending and prices both rising at the rate of, say, 50 percent per year. Now the government, in an effort rein in inflation, succeeds in reducing the increase in spending to 15 percent. If the rise in wage rates and prices has any kind of significant inertia, such as continuing at 40 percent, the effect will be a drop in production and employment to a level equal to 1.15/1.4, which represents a drop of about 18 percent. In the nearer-term future, unemployment will be promoted by any additional powers the government may give to labor unions, who will use them to raise wage rates even in the midst of mass unemployment, as they did from 1932 on in the Great Depression.)
Of course, given the prevailing readiness massively to expand the powers of government in order to deal with short-term crises, it is also possible that the government will enact wage and price controls in its efforts to fight the consequences of its inflation. If and when the controls are subsequently removed, there will again be a crisis of rising prices that, if not accompanied by still more inflation, will be followed by a major financial contraction. If the price controls are not removed, the economic system will be paralyzed and ultimately destroyed.
The upshot is that there is no good way out of the present crisis other than by meeting it through the free-market's means of a fall in wage rates and prices, mitigated to the maximum extent possible in ways consistent with the principle of economic freedom. What is required is a way out that once and for all ends the boom-bust cycle of inflation and credit expansion followed by deflation and contraction. The free market, a freer market than we have had up to now, is the only such solution.
Economic freedom and economic recovery both require that prices and wage rates be free to fall and that all legal obstacles in the way of their falling be immediately removed. In order for that to happen, as many people as possible must understand that falling prices are not deflation but the antidote to deflation.
A disastrous economic confusion, one that is shared almost universally, both by laymen and by professional economists alike, is the belief that falling prices constitute deflation and thus must be feared and, if possible, prevented.
The front-page, lead article of The New York Times of last November 1 provides a typical example of this confusion. It declares:
As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy — the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years.
The word for this is deflation, or declining prices, a term that gives economists chills.
Deflation accompanied the Depression of the 1930s. Persistently falling prices also were at the heart of Japan's so-called lost decade after the catastrophic collapse of its real estate bubble at the end of the 1980s — a period in which some experts now find parallels to the American predicament.
Contrary to The Times and so many others, deflation is not falling prices but a decrease in the quantity of money and/or volume of spending in the economic system. To say the same thing in different words, deflation is a general fall in demand. Falling prices are a consequence of deflation, not the phenomenon itself.
Totally apart from deflation, falling prices are also a consequence of increases in the production and supply of goods, which are an essential feature of economic progress and a rising standard of living. In such circumstances, falling prices are not accompanied by any plunge in business sales revenues or profits, by any increase in the difficulty of repaying debt, or by any surge in bankruptcies. All of these phenomena are the result purely and simply of deflation, not falling prices.
Indeed, under a full-bodied, 100-percent-reserve gold standard, falling prices, caused by increased production, are likely to be accompanied by a modest elevation of the rate of profit and a somewhat greater ease of repaying debt, both owing to the increase in the production and supply of gold and thus in the spending of gold. Under such a gold standard, prices fall to the extent that the increase in the production and supply of ordinary goods and services outstrips the increase in the production and supply of gold and the consequent increase in spending in terms of gold.
While this must certainly come as a surprise to The Times, and to everyone else who does not understand the nature of deflation, falling prices are in fact so far removed from being deflation that they are the antidote to deflation. They are what enables an economic system that has experienced deflation to recover from it and thereafter to enjoy the fruits of economic progress.
This conclusion can be demonstrated Socratically, by means of a simple question that could be used on an economics exam for sixth graders.
Thus, imagine that prior to the present financial downturn, Bill used to go shopping once a week in his local supermarket. When he went there, he could afford to spend $10 for bottled water. At the prevailing price of $1 per bottle, he was able to buy 10 bottles. Now, in the midst of the downturn, when Bill visits the supermarket, he can afford to spend only $5 for bottled water.
Here's the question: At what price per bottle of water would Bill be able to buy for $5 the 10 bottles of water he used to buy for $10? Answer: 50¢.
As this question and its answer make clear, a fall in prices enables reduced funds available for expenditure to buy as much as previously larger funds could buy.
This point applies even when lower prices do not result in greater purchases of the particular item whose price has fallen. Thus, suppose that the price of a gallon of milk is $8 and now falls to $4. Yet Bill and his family do not need more than one gallon in any given week, and so won't buy any larger quantity of milk at its now lower price. The fall in its price still helps economic recovery. It does so by freeing up $4 of Bill's funds to make possible the purchase of other things, that he wants but otherwise couldn't afford because of the lack of available funds.
Another, similar example is that of a fall in the price of gasoline or heating oil, which helps to increase the ability of people to spend in buying products throughout the economic system.
As indicated, in sharpest contrast to falling prices, deflation is a process of financial contraction. In our present crisis, it is a contraction of credit and of the spending that depends on credit. A fall in prices and, of course, in wage rates too, is the essential means of adapting to this deflation and overcoming it.
Nevertheless, the prevailing bizarre confusion of falling prices with deflation, stands in the way of economic recovery. In regarding falling prices, which are the effect of deflation and at the same time the remedy for deflation, as somehow themselves being deflation, people are led to confuse the solution for the problem with the problem that needs to be solved.
On the basis of this confusion, they advocate government intervention to prevent prices from falling. The prices they want to prevent from falling are, variously, house prices, farm and other commodity prices, and, above all, wage rates. To the extent that such efforts are successful, and prices are prevented from falling, the effect is to prevent economic recovery. It prevents economic recovery by preventing the reduced level of spending that deflation represents, from buying the larger quantity of goods and services that it would be able to buy at lower prices and wage rates.
Just as falling prices are so far from being deflation that they are the remedy for deflation, so too preventing prices from falling is so far from preventing deflation that it actually worsens the deflation. This is because it leads people to postpone buying even in instances in which they have the ability to buy. They put off buying in the expectation of being able to buy on better terms later on, when prices and wage rates have fallen to the extent necessary to permit economic recovery.
By the same token, when prices and wage rates finally do fall sufficiently to permit economic recovery, an increase in spending in the economic system will almost certainly occur. This is because the funds that people had been withholding from spending, awaiting the fall in prices and wages rates, will now, in the face of the necessary fall, be spent. Thus the necessary fall in prices and wage rates achieves economic recovery by means of creating greater buying power for a reduced amount of spending. It also brings about a partial restoration of spending and thereby definitively ends the deflation.
Just how far it is necessary for prices and wage rates to fall in order to achieve economic recovery depends on the change that has taken place in what Mises calls "the money relation." This is the relationship between the supply of money and the demand for money for holding.
During the boom, inflation and credit expansion increase the supply of money and at the same time reduce the demand for money for holding. Then, in the subsequent bust phase of the business cycle, the demand for money for holding rises and the supply of money can actually fall. Both of these factors make for a decline in total spending in the economic system and thus the need for a correspondingly lower level of wage rates and prices to achieve economic recovery.
How far these processes might go in our present circumstances and what might be done, consistent with the principle of economic freedom, to mitigate them, is too large a subject to explain in this one article.[1] However, I must state here that a decrease in the quantity of money can be altogether prevented and that this would dramatically limit the extent of the decline in overall spending in the economic system.
Whatever the reduced levels of spending that the changed money relation will support, the freedom of wage rates and prices to fall can achieve not only economic recovery but more than economic recovery. It can achieve the employment of everyone able and willing to work, i.e., full employment. And it could do so with no decline in the real wages of the average worker in the economic system, indeed, with a significant rise in his real wages. Unfortunately, this too is a subject too large to discuss further in the present article.[2]
Bailouts
Before closing, I must say a few words about the present efforts of the government to overcome the crisis by means of "bailouts" and their associated financing by budget deficits. Ultimately, these efforts are an attempt to overcome the effects of a rise in the demand for money for holding by means of a sufficiently large increase in the supply of money. In its campaign, the government appears to care for nothing but overcoming the crisis of the moment, without regard to the fuel it is providing for the next crisis.
The government today has unlimited powers of money creation. And so it is highly likely, given its evident willingness to use those powers, and the overwhelming public support that exists for using them, that the increase in the supply of money it brings about will ultimately outweigh the present increase in the public's demand for money for holding. When and to the extent that that happens, and business sales revenues and profits begin to rise and employment and wage rates begin to rise, the public's demand for money for holding will once again begin to fall.
At that point the massive increase in the quantity of money the government is currently bringing about will fuel sharply rising prices and give birth to a new crisis. This time, a crisis of inflation. Then, the government will either have to be content with a US economy that resembles the economic system of a Latin American country or it will have to rein in its inflation. If it chooses the latter quickly, we'll be back to the situation that prevailed in the early 1980s and have to undergo a fresh economic contraction, though probably one of much greater size than then, because of the unfinished business left over from the present crisis.
If the government delays too long in reining in its inflation, then when it finally does decide to do so, it may be confronted not only with prices rising as rapidly as they did in Latin America decades ago, but also with the massive unemployment rates that accompanied the efforts to rein in such major inflation. At that time, prices rising at a rate of 20, 30, or 50 percent or more were accompanied by comparably high unemployment rates. (To understand how such a thing can happen, imagine total spending and prices both rising at the rate of, say, 50 percent per year. Now the government, in an effort rein in inflation, succeeds in reducing the increase in spending to 15 percent. If the rise in wage rates and prices has any kind of significant inertia, such as continuing at 40 percent, the effect will be a drop in production and employment to a level equal to 1.15/1.4, which represents a drop of about 18 percent. In the nearer-term future, unemployment will be promoted by any additional powers the government may give to labor unions, who will use them to raise wage rates even in the midst of mass unemployment, as they did from 1932 on in the Great Depression.)
Of course, given the prevailing readiness massively to expand the powers of government in order to deal with short-term crises, it is also possible that the government will enact wage and price controls in its efforts to fight the consequences of its inflation. If and when the controls are subsequently removed, there will again be a crisis of rising prices that, if not accompanied by still more inflation, will be followed by a major financial contraction. If the price controls are not removed, the economic system will be paralyzed and ultimately destroyed.
The upshot is that there is no good way out of the present crisis other than by meeting it through the free-market's means of a fall in wage rates and prices, mitigated to the maximum extent possible in ways consistent with the principle of economic freedom. What is required is a way out that once and for all ends the boom-bust cycle of inflation and credit expansion followed by deflation and contraction. The free market, a freer market than we have had up to now, is the only such solution.
Economic freedom and economic recovery both require that prices and wage rates be free to fall and that all legal obstacles in the way of their falling be immediately removed. In order for that to happen, as many people as possible must understand that falling prices are not deflation but the antidote to deflation.
Water Footprints
“We live in an age in which, for better or worse,” explains Chris Mayer, “people of all kinds are obsessed with reducing their ‘carbon footprint.’ Now there are more footprints to worry about: water footprints.
“If you are a longtime reader, you will know exactly what that means. The Wall Street Journal recently gave some examples:
“It takes roughly 20 gallons of water to make a pint of beer, as much as 132 gallons of water to make a 2-liter bottle of soda and about 500 gallons of water, including water used to grow, dye and process cotton, to make a pair of Levi’s stonewashed jeans.”
“Other examples include the nearly 35 gallons of water behind every cup of coffee, the 700 gallons behind the typical dyed T-shirt and the 630 gallons to produce a single hamburger.
“There is a lot more attention focusing on reducing this water footprint, especially since water scarcity issues are cropping up a lot more these days. You know the numbers: Two-thirds of the world’s populations face water shortages by 2025, according to the U.N. And according to the U.S. GAO, about 36 states face water shortages by 2013.
“This is an important issue for industrial users of water all over the world. Nike, Pepsi, Starbucks, Levi’s and about 100 other companies recently held a conference in Miami on reducing water footprints. So this is serious business.”
“If you are a longtime reader, you will know exactly what that means. The Wall Street Journal recently gave some examples:
“It takes roughly 20 gallons of water to make a pint of beer, as much as 132 gallons of water to make a 2-liter bottle of soda and about 500 gallons of water, including water used to grow, dye and process cotton, to make a pair of Levi’s stonewashed jeans.”
“Other examples include the nearly 35 gallons of water behind every cup of coffee, the 700 gallons behind the typical dyed T-shirt and the 630 gallons to produce a single hamburger.
“There is a lot more attention focusing on reducing this water footprint, especially since water scarcity issues are cropping up a lot more these days. You know the numbers: Two-thirds of the world’s populations face water shortages by 2025, according to the U.N. And according to the U.S. GAO, about 36 states face water shortages by 2013.
“This is an important issue for industrial users of water all over the world. Nike, Pepsi, Starbucks, Levi’s and about 100 other companies recently held a conference in Miami on reducing water footprints. So this is serious business.”
Hillary's meeting with China's President...
Hillary Clinton met with China's President Hu Jintao in the palace in Beijing. She sat grim-faced as China's president issued a stern warning. The last thing the Obama administration wants to hear right now is that Communism doesn't work."
Today's Quotes...
"Everyone wants to live at the expense of the state. They forget that the state lives at the expense of everyone." --French economist, statesman and author Frederic Bastiat (1801-1850)
"With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people." --economist Fredrich von Hayek (1899-1992)
"Liberals claim to want to give a hearing to other views, but then are shocked and offended to discover that there are other views." --commentator, author and founder of National Review William F. Buckley Jr. (1925-2008)
"With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people." --economist Fredrich von Hayek (1899-1992)
"Liberals claim to want to give a hearing to other views, but then are shocked and offended to discover that there are other views." --commentator, author and founder of National Review William F. Buckley Jr. (1925-2008)
Omaba's is staying with his promises...
From the WSJ....
We were promised...and we will get..
***************************
"Anyone who thought the recession and financial market turmoil would moderate President Obama's policy ambitions discovered the opposite last night. Far from suggesting limits on Congress or federal spending, the new President made clear in his first State of the Union address that he believes in government power as the answer to our current difficulties, and he intends to use it. ... Mr. Obama is slowly revealing himself as a President who meant what he said going back to the primaries. He believes in the power of the state to drive prosperity, to reform the financial system and health care, and even to transform the entire energy economy. Mr. Obama said at one point that he didn't believe in government for its own sake, but his policy emphasis showed otherwise. ... Mr. Obama clearly believes the recession has created a political moment when Americans are frightened enough to be open to a new era of expanded government. The question is whether his vast ambitions will allow the private economy to grow enough even to begin to pay for it all." --The Wall Street Journal
We were promised...and we will get..
***************************
"Anyone who thought the recession and financial market turmoil would moderate President Obama's policy ambitions discovered the opposite last night. Far from suggesting limits on Congress or federal spending, the new President made clear in his first State of the Union address that he believes in government power as the answer to our current difficulties, and he intends to use it. ... Mr. Obama is slowly revealing himself as a President who meant what he said going back to the primaries. He believes in the power of the state to drive prosperity, to reform the financial system and health care, and even to transform the entire energy economy. Mr. Obama said at one point that he didn't believe in government for its own sake, but his policy emphasis showed otherwise. ... Mr. Obama clearly believes the recession has created a political moment when Americans are frightened enough to be open to a new era of expanded government. The question is whether his vast ambitions will allow the private economy to grow enough even to begin to pay for it all." --The Wall Street Journal
History Repeats
Need to assess your risks in this economy / market. History indicates that the good times do not last. Question is how prepared are you?
Elliott Wave - Expect Sharp / Fast Rally Up
Let's hope so!
Exits all shorts...and go long.
But this is only short term trade. Be prepared to sell.
*********************
Feb. 24 (Bloomberg) — Elliott Wave International Inc.’s Robert
Prechter, who advised shorting U.S. stocks three months before the bear
market began, said investors should now end those bets following the
recent market sell-off.
Prechter, chief executive of the market forecasting firm, warned in this
month’s ‘Elliott Wave Theorist’ that a rebound in stocks could be "sharp
and scary" for anyone who is so-called short. In a short sale, investors
borrow stock and agree to sell them at a later date on hopes of
capturing profit by replacing the shares after prices fall.
"This is an environment of escalating financial chaos," wrote Prechter,
who first shot to fame in the 1980s after cautioning investors that
stocks would crash two weeks before Black Monday. "Our main job is to
keep the money we have. If we exit now, we will do that."
Exits all shorts...and go long.
But this is only short term trade. Be prepared to sell.
*********************
Feb. 24 (Bloomberg) — Elliott Wave International Inc.’s Robert
Prechter, who advised shorting U.S. stocks three months before the bear
market began, said investors should now end those bets following the
recent market sell-off.
Prechter, chief executive of the market forecasting firm, warned in this
month’s ‘Elliott Wave Theorist’ that a rebound in stocks could be "sharp
and scary" for anyone who is so-called short. In a short sale, investors
borrow stock and agree to sell them at a later date on hopes of
capturing profit by replacing the shares after prices fall.
"This is an environment of escalating financial chaos," wrote Prechter,
who first shot to fame in the 1980s after cautioning investors that
stocks would crash two weeks before Black Monday. "Our main job is to
keep the money we have. If we exit now, we will do that."
Tuesday, February 24, 2009
Is It Any Surprise that More Bailouts are Required?
Hey....it should not be a surprise....business will all line up for as much hand outs / bail out funding that they can get.
As long as the government is funding them...they do not have the requirement to fix their problems.
So....it will continue..
******************
U.S. Is Pressed to Add Billions to Bailouts
By EDMUND L. ANDREWS, ANDREW ROSS SORKIN and MARY WILLIAMS WALSH
The government faced mounting pressure on Monday to put billions more in some of the nation’s biggest banks, two of the biggest automakers and the biggest insurance company, despite the billions it has already committed to rescuing them.
The government’s boldest rescue to date, its $150 billion commitment for the insurance giant American International Group, is foundering. A.I.G. indicated on Monday it was now negotiating for tens of billions of dollars in additional assistance as losses have mounted.
Separately, the Obama administration confirmed it was in discussions to aid Citigroup, the recipient of $45 billion so far, that could raise the government’s stake in the banking company to as much as 40 percent.
The Treasury Department named a special adviser to work with General Motors and Chrysler, two of Detroit’s biggest automakers, which are seeking $22 billion on top of the $17 billion already granted to them.
All these companies’ mushrooming needs reflect just how hard it is to stanch the flow of losses as the economy deteriorates. Even though the government’s finances are being stretched — and still more aid might be needed in the future — it is being forced to fill the growing holes in the finances of these companies out of fear that the demise of an important company could set off a chain reaction.
The deepening global downturn is dragging down all kinds of businesses, and, with no bottom to the recession in sight, investors sent the the Dow industrials down 250.89 points, or 3.7 percent, to 7,114.78, a 3.7 percent drop for the day and a loss of about 50 percent from their peak in the fall of 2007. Asian markets followed suit on Tuesday by flirting with the lows they hit last October, with stocks in Hong Kong dropping more than 3 percent, and Japan's Nikkei 225 index dropping more than 2 percent before rebounding slightly.
In an unexpectedly assertive joint statement after two weeks of bank stock declines, the Treasury Department, the Federal Reserve and federal bank regulatory agencies announced that the government might demand a direct ownership stake in major banks that do not have enough capital to weather a deeper downturn. The government will begin conducting a test of the banks’ financial health this week.
Administration officials emphasized that nationalizing any of the major banks was their least favorite solution to the banking crisis, but they acknowledged that some banks might be both too big to fail and too fragile to endure another round of shocks without substantial help.
Banks that fail the test will have to raise additional capital. If they are unable to raise capital in the private market, they would have to take money from the government in exchange for preferred stock that would be convertible into common shares, thus giving the government a bigger stake.
The administration is debating how big a role to play in the auto businesses, what concessions the companies should make in return for aid and whether bankruptcy should be considered, though it prefers a private sector solution.
On Monday, Steven Rattner, co-founder of a private equity firm, the Quadrangle Group, was named an adviser to the Treasury on the auto industry.
As the administration takes bigger stakes in companies, the value held by existing shareholders is being diluted, which could make it even harder to attract private money in the future.
Timothy F. Geithner, the secretary of the Treasury, recently outlined a bank recovery plan that included a program to attract a combination of public and private money to buy troubled mortgages and other assets.
A.I.G. serves as a cautionary note about the difficulty of luring private investors when the size of the losses is unknown. In the months since the government initially stepped in last fall to take an 80 percent stake in the insurer, the company has suffered deepening losses and has been forced to post more collateral with its trading partners.
The company, according to a person close to the negotiations, is discussing the prospect of converting the government’s $40 billion in preferred shares into common equity.
The prototype could turn out to be Citigroup, which is negotiating with regulators to replace the government’s nonvoting preferred shares with shares that are convertible into common stock.
“We absolutely believe that our private banking system is best off being in private hands and we are trying our best to keep it that way,” said one senior administration official, who spoke on condition of anonymity. But, he continued, the government is already deeply involved in propping up the banking system and may have no choice.
Officials said they were bracing for the possibility of new problems that might indeed require the government to take a more aggressive stance.
“Given our involvement at this particular stage, there is an element, a possibility over time, that we will end up with some ownership of these institutions,” the official said. “This is really about aggressive anticipatory action. It is an acceptance that the future is uncertain, but that we can plan on a certain basis for it.”
Acquiring common stock would give the government more control, but expose it to more risk. Armed with voting shares, government officials would have more power to replace management and change company strategy. But the Treasury would lose its claim to dividend payments, which in Citigroup’s case amount to more than $2.25 billion a year.
A.I.G. declined to provide details of its new financial problems, citing the “quiet period” just before it issues fourth-quarter results. But some people familiar with A.I.G.’s negotiations said it was on the brink of reporting one of the biggest year-end losses in American history.
Such losses lead to a bigger problem. A further credit rating downgrade would force the company to raise more capital, according to a person involved in the negotiations. The losses appeared to be across the board, unlike the insurer’s losses of last September, which were confined mostly to derivative contracts called credit-default swaps.
A.I.G. has not been writing new credit-default swap contracts, and had tried to put the swaps disaster behind it. In November the company worked out a relief package with the Federal Reserve Bank of New York, in which the most toxic of its swap contracts were put into a kind of quarantine, so they could no longer hurt its balance sheet. But A.I.G. had written several other classes of credit-default swaps, which it kept on its books.
If the latest round of losses severely weaken A.I.G.’s capital and its creditworthiness, then its swap counterparties may be entitled to demand that A.I.G. come up with a large amount of cash for collateral — precisely the problem that brought the company to its knees last September.
“They stand, unfortunately, to bring others down with them if they go down,” said Donn Vickrey of Gradient Analytics, an independent research firm.
The difficulty of shoring up A.I.G. must weigh on the administration at this moment. The administration’s banking statement amounted to a plan of action demonstrating a way to demand a major and possibly a controlling stake in systemically important banks like Citigroup and Bank of America.
“They are desperate to not nationalize the banks,” said Robert J. Barbera, chief economist at ITG. “They know what happened when they took Iraq and they would just as soon not take over the banks, because if you own it, you gotta fix it.”
As long as the government is funding them...they do not have the requirement to fix their problems.
So....it will continue..
******************
U.S. Is Pressed to Add Billions to Bailouts
By EDMUND L. ANDREWS, ANDREW ROSS SORKIN and MARY WILLIAMS WALSH
The government faced mounting pressure on Monday to put billions more in some of the nation’s biggest banks, two of the biggest automakers and the biggest insurance company, despite the billions it has already committed to rescuing them.
The government’s boldest rescue to date, its $150 billion commitment for the insurance giant American International Group, is foundering. A.I.G. indicated on Monday it was now negotiating for tens of billions of dollars in additional assistance as losses have mounted.
Separately, the Obama administration confirmed it was in discussions to aid Citigroup, the recipient of $45 billion so far, that could raise the government’s stake in the banking company to as much as 40 percent.
The Treasury Department named a special adviser to work with General Motors and Chrysler, two of Detroit’s biggest automakers, which are seeking $22 billion on top of the $17 billion already granted to them.
All these companies’ mushrooming needs reflect just how hard it is to stanch the flow of losses as the economy deteriorates. Even though the government’s finances are being stretched — and still more aid might be needed in the future — it is being forced to fill the growing holes in the finances of these companies out of fear that the demise of an important company could set off a chain reaction.
The deepening global downturn is dragging down all kinds of businesses, and, with no bottom to the recession in sight, investors sent the the Dow industrials down 250.89 points, or 3.7 percent, to 7,114.78, a 3.7 percent drop for the day and a loss of about 50 percent from their peak in the fall of 2007. Asian markets followed suit on Tuesday by flirting with the lows they hit last October, with stocks in Hong Kong dropping more than 3 percent, and Japan's Nikkei 225 index dropping more than 2 percent before rebounding slightly.
In an unexpectedly assertive joint statement after two weeks of bank stock declines, the Treasury Department, the Federal Reserve and federal bank regulatory agencies announced that the government might demand a direct ownership stake in major banks that do not have enough capital to weather a deeper downturn. The government will begin conducting a test of the banks’ financial health this week.
Administration officials emphasized that nationalizing any of the major banks was their least favorite solution to the banking crisis, but they acknowledged that some banks might be both too big to fail and too fragile to endure another round of shocks without substantial help.
Banks that fail the test will have to raise additional capital. If they are unable to raise capital in the private market, they would have to take money from the government in exchange for preferred stock that would be convertible into common shares, thus giving the government a bigger stake.
The administration is debating how big a role to play in the auto businesses, what concessions the companies should make in return for aid and whether bankruptcy should be considered, though it prefers a private sector solution.
On Monday, Steven Rattner, co-founder of a private equity firm, the Quadrangle Group, was named an adviser to the Treasury on the auto industry.
As the administration takes bigger stakes in companies, the value held by existing shareholders is being diluted, which could make it even harder to attract private money in the future.
Timothy F. Geithner, the secretary of the Treasury, recently outlined a bank recovery plan that included a program to attract a combination of public and private money to buy troubled mortgages and other assets.
A.I.G. serves as a cautionary note about the difficulty of luring private investors when the size of the losses is unknown. In the months since the government initially stepped in last fall to take an 80 percent stake in the insurer, the company has suffered deepening losses and has been forced to post more collateral with its trading partners.
The company, according to a person close to the negotiations, is discussing the prospect of converting the government’s $40 billion in preferred shares into common equity.
The prototype could turn out to be Citigroup, which is negotiating with regulators to replace the government’s nonvoting preferred shares with shares that are convertible into common stock.
“We absolutely believe that our private banking system is best off being in private hands and we are trying our best to keep it that way,” said one senior administration official, who spoke on condition of anonymity. But, he continued, the government is already deeply involved in propping up the banking system and may have no choice.
Officials said they were bracing for the possibility of new problems that might indeed require the government to take a more aggressive stance.
“Given our involvement at this particular stage, there is an element, a possibility over time, that we will end up with some ownership of these institutions,” the official said. “This is really about aggressive anticipatory action. It is an acceptance that the future is uncertain, but that we can plan on a certain basis for it.”
Acquiring common stock would give the government more control, but expose it to more risk. Armed with voting shares, government officials would have more power to replace management and change company strategy. But the Treasury would lose its claim to dividend payments, which in Citigroup’s case amount to more than $2.25 billion a year.
A.I.G. declined to provide details of its new financial problems, citing the “quiet period” just before it issues fourth-quarter results. But some people familiar with A.I.G.’s negotiations said it was on the brink of reporting one of the biggest year-end losses in American history.
Such losses lead to a bigger problem. A further credit rating downgrade would force the company to raise more capital, according to a person involved in the negotiations. The losses appeared to be across the board, unlike the insurer’s losses of last September, which were confined mostly to derivative contracts called credit-default swaps.
A.I.G. has not been writing new credit-default swap contracts, and had tried to put the swaps disaster behind it. In November the company worked out a relief package with the Federal Reserve Bank of New York, in which the most toxic of its swap contracts were put into a kind of quarantine, so they could no longer hurt its balance sheet. But A.I.G. had written several other classes of credit-default swaps, which it kept on its books.
If the latest round of losses severely weaken A.I.G.’s capital and its creditworthiness, then its swap counterparties may be entitled to demand that A.I.G. come up with a large amount of cash for collateral — precisely the problem that brought the company to its knees last September.
“They stand, unfortunately, to bring others down with them if they go down,” said Donn Vickrey of Gradient Analytics, an independent research firm.
The difficulty of shoring up A.I.G. must weigh on the administration at this moment. The administration’s banking statement amounted to a plan of action demonstrating a way to demand a major and possibly a controlling stake in systemically important banks like Citigroup and Bank of America.
“They are desperate to not nationalize the banks,” said Robert J. Barbera, chief economist at ITG. “They know what happened when they took Iraq and they would just as soon not take over the banks, because if you own it, you gotta fix it.”
Sunday, February 22, 2009
Quote...
“The borrowers that really stretched to buy their house and lied the most about their income receive the largest break in payments,” Laurie Goodman and Roger Ashworth analysts for Amherst Securities on the Obama mortgage bailout plan.
Soros sees no bottom for world financial "collapse"
Soros sees no bottom for world financial "collapse"
Sat Feb 21, 4:19 pm ET
NEW YORK (Reuters) – Renowned investor George Soros said on Friday the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis.
Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union.
He said the bankruptcy of Lehman Brothers in September marked a turning point in the functioning of the market system.
"We witnessed the collapse of the financial system," Soros said at a Columbia University dinner. "It was placed on life support, and it's still on life support. There's no sign that we are anywhere near a bottom."
His comments echoed those made earlier at the same conference by Paul Volcker, a former Federal Reserve chairman who is now a top adviser to President Barack Obama.
Volcker said industrial production around the world was declining even more rapidly than in the United States, which is itself under severe strain.
"I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world," Volcker said.
(Reporting by Pedro Nicolaci da Costa and Juan Lagorio; Editing by Gary Hill)
Sat Feb 21, 4:19 pm ET
NEW YORK (Reuters) – Renowned investor George Soros said on Friday the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis.
Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union.
He said the bankruptcy of Lehman Brothers in September marked a turning point in the functioning of the market system.
"We witnessed the collapse of the financial system," Soros said at a Columbia University dinner. "It was placed on life support, and it's still on life support. There's no sign that we are anywhere near a bottom."
His comments echoed those made earlier at the same conference by Paul Volcker, a former Federal Reserve chairman who is now a top adviser to President Barack Obama.
Volcker said industrial production around the world was declining even more rapidly than in the United States, which is itself under severe strain.
"I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world," Volcker said.
(Reporting by Pedro Nicolaci da Costa and Juan Lagorio; Editing by Gary Hill)
Saturday, February 21, 2009
The Euro, Fundamentally will not work
When others were fawning over the European Union and its committee creation of the euro, Milton Friedman made this prescient and brilliant comment:
"It seems to me that Europe, especially with the addition of more countries, is becoming ever-more susceptible to any asymmetric shock. Sooner or later, when the global economy hits a real bump, Europe's internal contradictions will tear it apart."
"It seems to me that Europe, especially with the addition of more countries, is becoming ever-more susceptible to any asymmetric shock. Sooner or later, when the global economy hits a real bump, Europe's internal contradictions will tear it apart."
Friday, February 20, 2009
"Volcker- "Even the experts don't quite know what's going on."
Volcker sees crisis leading to global regulation
By EILEEN AJ CONNELLY, AP Business Writer Eileen Aj Connelly, Ap Business Writer
NEW YORK – "Even the experts don't quite know what's going on."
Speaking to a number of those experts Friday, Paul Volcker, a top economic adviser to President Barack Obama, cited not only the lack of understanding of the global financial meltdown but the "shocking" speed with which it had spread across the world.
"One year ago, we would have said things were tough in the United States, but the rest of the world was holding up," Volcker told a conference featuring Nobel laureates, economists and investors at Columbia University in New York. "The rest of the world has not held up."
In fact, the 81-year-old former chairman of the Federal Reserve said, "I don't remember any time, maybe even the Great Depression, when things went down quite so fast."
He noted that industrial production is falling in countries across the globe faster than in the U.S., one result of the decline caused by the breakdown of unbridled financial markets that operated on a global scale.
"It's broken down in the face of almost all expectation and prediction," he noted.
Volcker didn't offer specifics on how long he thinks the recession will last or what will help start a recovery. But he predicted there will be some lasting lessons from the experience.
"I don't believe it will be forgotten ... and we will revert to the kind of financial system we had before the crisis," he said.
While he assured his audience of his confidence that capitalism will survive, Volcker said stronger regulations are needed to protect the world economy from such future shocks.
And he said he is concerned about the amount of power central banks, treasuries and regulatory agencies have acquired while trying to contain the meltdown.
"It is evident in the United States, and not just in the United States, the central bank is taking on a role that is way beyond what a central bank should be taking," he said.
Volcker stressed the importance of international cooperation in creating a new regulatory framework, particularly for major banks that operate across national boundaries — the reverse of what's happened in recent years.
"The more international agreement we have on where we want to get to, the better off we'll be," Volcker said.
And while major banks should be more tightly controlled and less able to make the sort of risky bets that led to their current debacle, Volcker said there should also be more oversight of some kind for hedge funds, equity funds and the remaining investment banks.
He scoffed at the notion that those entities must be free to innovate — stating that financial "innovations" like asset backed securities and credit default swaps have brought few benefits. The most important "innovation" in banking for most people in the last 20 or 30 years, he maintained, is the automatic teller machine.
By EILEEN AJ CONNELLY, AP Business Writer Eileen Aj Connelly, Ap Business Writer
NEW YORK – "Even the experts don't quite know what's going on."
Speaking to a number of those experts Friday, Paul Volcker, a top economic adviser to President Barack Obama, cited not only the lack of understanding of the global financial meltdown but the "shocking" speed with which it had spread across the world.
"One year ago, we would have said things were tough in the United States, but the rest of the world was holding up," Volcker told a conference featuring Nobel laureates, economists and investors at Columbia University in New York. "The rest of the world has not held up."
In fact, the 81-year-old former chairman of the Federal Reserve said, "I don't remember any time, maybe even the Great Depression, when things went down quite so fast."
He noted that industrial production is falling in countries across the globe faster than in the U.S., one result of the decline caused by the breakdown of unbridled financial markets that operated on a global scale.
"It's broken down in the face of almost all expectation and prediction," he noted.
Volcker didn't offer specifics on how long he thinks the recession will last or what will help start a recovery. But he predicted there will be some lasting lessons from the experience.
"I don't believe it will be forgotten ... and we will revert to the kind of financial system we had before the crisis," he said.
While he assured his audience of his confidence that capitalism will survive, Volcker said stronger regulations are needed to protect the world economy from such future shocks.
And he said he is concerned about the amount of power central banks, treasuries and regulatory agencies have acquired while trying to contain the meltdown.
"It is evident in the United States, and not just in the United States, the central bank is taking on a role that is way beyond what a central bank should be taking," he said.
Volcker stressed the importance of international cooperation in creating a new regulatory framework, particularly for major banks that operate across national boundaries — the reverse of what's happened in recent years.
"The more international agreement we have on where we want to get to, the better off we'll be," Volcker said.
And while major banks should be more tightly controlled and less able to make the sort of risky bets that led to their current debacle, Volcker said there should also be more oversight of some kind for hedge funds, equity funds and the remaining investment banks.
He scoffed at the notion that those entities must be free to innovate — stating that financial "innovations" like asset backed securities and credit default swaps have brought few benefits. The most important "innovation" in banking for most people in the last 20 or 30 years, he maintained, is the automatic teller machine.
Change is Coming!
"This is our moment, this is our time to turn the page on the policies of the past, to offer a new direction. We are fundamentally transforming the United States of America. And generations from now, we will be able to look back and tell our children that this was our time." --Barack Hussein Obama
************
We were told what would be happening!
************
We were told what would be happening!
Thursday, February 19, 2009
The Solution?? This this what we want?
The Western govts approach to the financial and economical debt problems with bailouts and stimulus is creating a "pick and choose" world. It determines who get what and how much. It is not to who does the best or does well. There are new economic and financial rules that are being created. These new rules and regulations do not require earning of a profit, or pay back of the govt financing, it requires meeting certain "social" policies.
This is not free markets. This is Central Planning, and we all know how well that works!
The fix to this financial / economic problem, is not with govt bail outs or spending. This problem was caused by something else. That issue needs to be resolved.
The solution to this problem is not easy nor pretty.
But that is what is what people want and politicans promise.
The solution that the Central Planners are promoting will only make the problem deeper and longer. Eg ...the 1930's
That all said...I think Canada is better managed than most of the Western World, however, Canada will be hurting during this down turn, since it is resource based economy.
This is not free markets. This is Central Planning, and we all know how well that works!
The fix to this financial / economic problem, is not with govt bail outs or spending. This problem was caused by something else. That issue needs to be resolved.
The solution to this problem is not easy nor pretty.
But that is what is what people want and politicans promise.
The solution that the Central Planners are promoting will only make the problem deeper and longer. Eg ...the 1930's
That all said...I think Canada is better managed than most of the Western World, however, Canada will be hurting during this down turn, since it is resource based economy.
Wednesday, February 18, 2009
Obmaba....has already done more by....
"[Obama] achieved more of his aims in this single legislation than many presidents will achieve in an entire term. I mean there's more new net public investment here on things the Democrats consider essential for long-term growth like education, scientific research, alternative energy, than Bill Clinton was able to achieve in two terms." --Atlantic Media's Ronald Brownstein
$263,000 per worker....now that is Stimulus!
Stimulus: Say this for the $787 billion behemoth that Congress voted on Friday -- never in our history has a more important vote been cast on legislation with so little scrutiny. Couldn't they at least read the thing before voting on it? The 1,434-page bill is, in a word, massive. It's full of details that deserve to be given a close look before anyone votes. ... The bill that President Obama called 'the largest change in domestic policy since the 1930s' was jammed down Congress' throat, breaking almost all the promises of bipartisanship and transparency along the way. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid vowed to give members of Congress at least 48 hours to look at the historic legislation before them. After all, the bill will spend the equivalent of nearly 9% of our GDP while adding $1.2 trillion to our national debt. Obama vows to 'create or save' 3.5 million jobs at a cost of $263,000 per job. Shouldn't it get even a little bit of scrutiny? Apparently not. ... Why the haste? Surely one reason is the bill is stuffed with pork and short of real stimulus. Its authors don't want the details out. They shouldn't be surprised, then, when voters bridle at what they've been saddled with." --Investor's Business Daily
What is Fascism?
T]he state is getting more and more deeply involved in business, even taking controlling interests in some private companies. And the state is even trying to 'make policy' for private companies they do not control, but merely 'help' with 'infusions of capital'.... So state power is growing at the expense of corporations. But that's not socialism. Socialism rests on a firm theoretical bedrock: the abolition of private property. ... It's fascism." --columnist Michael Ledeen
Quote....The real destroyer of
"The real destroyer of the liberties of the people is he who spreads among them bounties, donations and benefits." --Roman historian Plutarch (c.45-125 A.D.)
Sunday, February 15, 2009
Saturday, February 14, 2009
Update: yes, the Paulson Plan was just theft
Fabius Maximus | Feb 14, 2009
Opening of “The Paulson Plan will buy assets cheap, just as all good cons offer easy money to the marks” (30 September 2008):
“Buy this because it is extraordinarily cheap. The owner must sell right now because…
This is the opening line of a thousand confidence games. Stories told by well-dressed, smooth-talking grifters. Like many of those sent out to sell the Paulson Plan (which is not dead, as Congress will certainly reconsider some form of it later this week).
The government can buy financial assets from the world’s leading financial firms at prices so low that substantial profits are likely.
Read those words. Confidence tricks require marks, people who believe preposterous statements about promised gains if stated authoritatively and backed with a slick story.
* “The Paulson Plan Will Make Money For Taxpayers“, Andy Kessler, Op-ed in the Wall Street Journal, 25 September 2008
* “Bailout May Be Granddaddy of All Carry Trades“, John M. Berry, Bloomberg, 26 September 2008
* “Taxpayers can still benefit from a bail-out“, Lawrence Summers, op-ed in the Financial Times, 28 September 2008
Now the Congressional Oversight Panel tells us the tab after the first few months of the “THEFT TART (Troubled Assets Relief Program): $78 billion. Don’t worry, the money was not lost. It’s just moved from your pockets to those of people with great political influence.
Only fools expected any other outcome. And the meter is still running, with the losses mounting day by day. To read the unpleasnat details see “Congressional Oversight Panel Releases Third Monthly Oversight Report: Valuing Treasury Acquisitions“, 6 Feburary 2009 — Excerpt:
The report acknowledges that Treasury may have had valid policy reasons for making these transactions, and that it is possible that the value of the investments may eventually be worth more than the amount Treasury paid—or they may be worth much less. The report does not take a position on whether Treasury pursued the correct strategy, instead focusing on the contrast between the quantitative results of the study and the statements made by Secretary Paulson last year.
Last fall, Treasury sold the American public on the TARP program by claiming that it would help banks while protecting taxpayers. Secretary Paulson described the transactions as ‘at or near par’—that the value the assets Treasury received was roughly equal to the money being spent. But that didn’t happen. Treasury got less than it spent.” said Elizabeth Warren, the Chair of the Oversight Panel. “Treasury should have leveled with the American people about the purpose of the program. It’s time to explain what’s happened so that we can have a good, old-fashioned debate about whether this is the smartest way to spend our money.
********************
Paulson ripped us off... he was good at it..but wait, the lesson still has not been learned.
How long will taxpayers allow govt / congress to move funds from the people to give more to big business and special interest groups?
Opening of “The Paulson Plan will buy assets cheap, just as all good cons offer easy money to the marks” (30 September 2008):
“Buy this because it is extraordinarily cheap. The owner must sell right now because…
This is the opening line of a thousand confidence games. Stories told by well-dressed, smooth-talking grifters. Like many of those sent out to sell the Paulson Plan (which is not dead, as Congress will certainly reconsider some form of it later this week).
The government can buy financial assets from the world’s leading financial firms at prices so low that substantial profits are likely.
Read those words. Confidence tricks require marks, people who believe preposterous statements about promised gains if stated authoritatively and backed with a slick story.
* “The Paulson Plan Will Make Money For Taxpayers“, Andy Kessler, Op-ed in the Wall Street Journal, 25 September 2008
* “Bailout May Be Granddaddy of All Carry Trades“, John M. Berry, Bloomberg, 26 September 2008
* “Taxpayers can still benefit from a bail-out“, Lawrence Summers, op-ed in the Financial Times, 28 September 2008
Now the Congressional Oversight Panel tells us the tab after the first few months of the “THEFT TART (Troubled Assets Relief Program): $78 billion. Don’t worry, the money was not lost. It’s just moved from your pockets to those of people with great political influence.
Only fools expected any other outcome. And the meter is still running, with the losses mounting day by day. To read the unpleasnat details see “Congressional Oversight Panel Releases Third Monthly Oversight Report: Valuing Treasury Acquisitions“, 6 Feburary 2009 — Excerpt:
The report acknowledges that Treasury may have had valid policy reasons for making these transactions, and that it is possible that the value of the investments may eventually be worth more than the amount Treasury paid—or they may be worth much less. The report does not take a position on whether Treasury pursued the correct strategy, instead focusing on the contrast between the quantitative results of the study and the statements made by Secretary Paulson last year.
Last fall, Treasury sold the American public on the TARP program by claiming that it would help banks while protecting taxpayers. Secretary Paulson described the transactions as ‘at or near par’—that the value the assets Treasury received was roughly equal to the money being spent. But that didn’t happen. Treasury got less than it spent.” said Elizabeth Warren, the Chair of the Oversight Panel. “Treasury should have leveled with the American people about the purpose of the program. It’s time to explain what’s happened so that we can have a good, old-fashioned debate about whether this is the smartest way to spend our money.
********************
Paulson ripped us off... he was good at it..but wait, the lesson still has not been learned.
How long will taxpayers allow govt / congress to move funds from the people to give more to big business and special interest groups?
Time for a Reality Check
February 13, 2009
By John Mauldin
It is not just the US that is in recession. The world is slowing down, and rapidly. This week we quickly survey the rest of the world, and then come back to the US. We follow up with the implications for corporate earnings worldwide, and specifically address my speculations about earnings forecasts for 2009.
World Trade Is Falling Off a Cliff
Let's start with some charts from my friend Simon Hunt, out of London. The following chart shows World Merchandise Export Values and World Industrial Production falling off a cliff. This is the worst such period since the end of World War II. And as the data we will examine next indicates, it is likely to get worse. Simon notes that consumer spending is about 60% of world GDP, and it is not just in the US that spending is slowing down. Consumers all over the developed world are in shock, as assets such as stocks and houses, real estate, and commodities fall in value. Unemployment is rising.
We think that almost 2,000,000 lost jobs in the last three months in the US is a catastrophe. China lost a reported 20,000,000 jobs in the last quarter, and migrant workers came back to the cities after Chinese New Year to find factories and jobs simply gone. Unemployment is rising rapidly in Europe, as the demand for goods has clearly been falling since last October.
This means that inventories are too high, not just in the US but in factories all over the world, and that production is slowing down. Look at the recent US trade deficit. Many market analysts rejoiced that it dropped to a six-year low, just below $40 billion. But the internal numbers were not as positive. Exports are dropping faster than imports, as seen below. "After growing in every quarter during the last three years, real goods exports fell 34.9% at an annual rate, the worst performance in more than three decades." (www.dismal.com) And a falling deficit means that US consumers have to save more to balance out less foreign buying of US debt. There is no free lunch.
Let's look at a little bit of insider economics trivia. The US government first estimated that GDP last quarter was a negative 3.8%. I wrote when that number first came out that it would be revised downward.
When the government makes its initial forecast of GDP one month following the end of a quarter, it has to estimate what exports and imports were for the last month of the quarter. There is simply no data. For the 4th quarter of 2008, they estimated that the trade deficit would be about $34.5 billion, in line with what most economists thought. As it turns out, each $1 billion represents about 0.1% of GDP. So being off about $5 billion from the actual total of $40 billion subtracts another 0.5% of GDP from the previous estimate of -3.8%, taking it to a -4.3%.
Further, the government makes estimates about inventories which also affect GDP. When final numbers on real inventories come in, it will also add to the negative GDP estimate. Expect GDP to be in the range of a negative 5% for the 4th quarter, and the current quarter is likely to be almost as weak.
In the US, the leading economic indicators (LEI) continued to decline, but the leading indicators in the rest of the world were often much worse. (The chart below is again from Simon Hunt.) These are results from the OECD's analysis of the leading economic indicators for a variety of countries. Notice in particular how poorly Russia and China are doing! Also remember that the LEI is about how the economy is expected to be doing in six months, not what is going on right now. This argues that there is no real global turnaround in the picture before the end of the third quarter, at the earliest.
China has seen its year-over-year exports drop by 17.5% and imports by 43%. These are not signs of a healthy economy. That being said, China is massively increasing bank loans and other stimulus-type spending to try and offset the effects of the global downturn. But putting 20 million people back to work in a short time is a daunting task.
Japanese GDP was down by 9% (!) last quarter. Many of the largest corporations are seeing exports drop by 20-30% and are engaged in massive layoffs, larger proportionally than in the US. The euro area economy dropped by 6% in the 4th quarter, led by an 8.2% contraction in Germany (JP Morgan). I could go on and on, but the news is the same. The global economy is in a deep and worsening recession.
European Bank Losses Dwarf Those in the US
In a few paragraphs I am going to put up a chart from Nouriel Roubini's RGE Monitor on the size of US bank losses, and in a few pages I'll comment on the Geithner "plan" for rescuing US banks. We have indeed dug ourselves a very deep hole here in the US.
But European banks may be in far worse shape. Bruno Waterfield of the London Daily Telegraph reports to have seen an eyes-only document prepared by the European Commission for the finance ministers of the various EU member countries. The problem revealed in the report is an estimated write-down by European banks in the range of 16 trillion pounds, or about $25 trillion dollars! The concern is that bailing out the various national banks for such an unbelievable amount would push the cost of government borrowing to much higher levels than we see today.
As my kids would say, "Really, Dad, you think so?" Europe is somewhat larger than the US, so think what my gold-bug friends would say if the US decided to borrow $25 trillion to bail out US banks. The dollar would be crucified! The euro is going to get a lot weaker if bank problems are even half of what the report says they are. The British pound sterling is already off almost 30% and, depending on what the real damage is to their banking system, it could get worse.
Waterfield reports, "National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors -- particularly those who lend money to European governments -- have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.
"The Commission figure is significant because of the role EU officials will play in devising rules to evaluate 'toxic' bank assets later this month. New moves to bail out banks will be discussed at an emergency EU summit at the end of February. The EU is deeply worried at widening spreads on bonds sold by different European countries."
Part of the problem is that European banks were far more highly leveraged than US banks. Some banks were reportedly leveraged 50:1. And they lent money to Eastern European projects and businesses which are now facing severe financial strain and plummeting local currencies.
Let that number rattle around in your head for a moment: $25 trillion. Even $5 trillion would be daunting. But the problem is that Europe does not have a central bank that can step in and selectively save banks from one country without taking on all euro zone member-country banks. Yet, as noted above, some countries may not have the wherewithal to save their own banks. It is reported that some Austrian banks are hoping that Germany will step in and help them. Given Germany's problems, they may have a long wait.
Now, let's look at what Nouriel Roubini (www.RGEmonitor.com and professor at NYU) estimates for US banks losses. He puts the figure at some $1.7-1.8 trillion out of a total of about $3 trillion (I think) in total financial system losses. And Nouriel's base assumptions are not all that bearish, given what we know: a 5% GDP contraction and 9% unemployment, with housing prices down another 20%. All those estimates are quite plausible.
And a quick promotional plug: my next recorded "Conversation" will be with Nouriel and his staff in a few weeks. See the link at the end of the letter to make sure you get your copy.
Geithner: "You Can't Handle the Truth"
The critics were quick to pan Treasury Secretary Tim Geithner's bank bailout plan as being weak on details. Which was true. There wasn't much substance in his speech. But let me offer a contrarian view. Geithner and the team around him may not be entirely tone deaf. They are very smart people and are surely in contact with major Wall Street figures, and would know that the lack of detail would disappoint.
Pretty much everyone knows the scene from A Few Good Men, where Jack Nicholson tells Tom Cruise, "You can't handle the truth!" (www.youtube.com/watch?v=8hGvQtumNAY)
What if the number that the Treasury and the Fed are looking at is a lot more than the remaining $350 billion in the TARP program? As in another $1 trillion more, or even the $1.5 trillion that Roubini says may be out there (and other independent analysts, like David Rosenberg of Merrill, say there may be another $2 trillion in losses). Can you imagine what the market reaction would have been if they had announced that this week? The Dow down 400 points would have seemed like a Sunday walk in the park. Congress would be screaming, and the chances for the stimulus package to pass would have materially diminished.
I don't think we know the real extent of what it is going to cost to shore up the banking system. But the consensus among the financial leadership is that we have to fix the credit system no matter what the costs, or risk a repeat of the Great Depression. That is the essence of what Irving Fisher taught us some 75 years ago, when faced with a deflationary debt crisis.
Time for a Reality Check
Reality check: The "stimulus" that President Obama will sign Monday is a band-aid. If Irving Fisher, who by some accounts was our finest American economist, was right, such a stimulus is useful in that it helps those who are unemployed and replaces some lost consumer spending; but the real work that must be done is to get the credit system flowing again. I don't have the space to go into that economic debate tonight, but it is at the core of the problem. It is Keynes vs. Fisher, von Mises vs. Friedman. It is, as Lacy Hunt says, "The Grand Experiment." After 70 years, we are going to see who is right. My money is on Fisher. It is not an experiment that is going to be fun to live through; but when we have the next debt deflation in 70 years or so, our grandchildren may know what to do.
We will see another stimulus package, probably by the end of the year. This time it will hopefully provide real stimulus. Much of the current version is simply an increase in federal spending that will be hard to rein in. And please, I am not being partisan. That is the analysis of many of Obama's advisors. And it goes back to the debate I mentioned. Keynes would argue that it is in fact stimulus. The other three economists would have differing views. And like I said, in a few years we are going to know who was right.
But the heavy lifting is going to be done by the Fed. Watch their balance sheet expand. And watch Treasury and the FDIC come back and ask for massive amounts of money to take over very large insolvent banks. Stay tuned.
Earnings Will Get Even Worse
Last week I said that 2009 as-reported earnings estimates for the S&P 500 would be dropping. 2008 earnings had dropped to $29.57 as I wrote the letter. They are now down to $28.60. One of my favorite analysts is David Rosenberg of Merrill Lynch. His forecast for reported earnings for 2009 is now down to $28. That puts the P/E for the S&P 500 at 30.
He also projects "operating" earnings to be $55 for 2010. And, as he writes today:
"For those looking for a silver lining, at least we are going to have a deeper bottom to bounce off. Applying a classic recession-trough multiple of 12x against a forward EPS estimate of $55 would imply an ultimate low of 666 on the S&P 500, likely by October if our estimate of the timing for the end of the official downturn is accurate."
That is a 20% drop from today's close of 829. That is not what you will hear from "sell-side" managers who want you to invest in their mutual funds and long-only management programs.
I noted the problem with the rest of the world earlier. 40% of the earnings for the S&P 500 are from outside the US. It is hard to see how those earnings are not going to be deeply affected. Let me reiterate my continued warning: this is not a market you want to buy and hold from today's level. This is just far too precarious an economic and earnings environment.
Given the probable ongoing bad news from financial and consumer stocks, plus the depressing news on bank losses coming down the road, why take the risk?
John Mauldin
John@frontlinethoughts.com
Copyright 2009 John Mauldin. All Rights Reserved
John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore
By John Mauldin
It is not just the US that is in recession. The world is slowing down, and rapidly. This week we quickly survey the rest of the world, and then come back to the US. We follow up with the implications for corporate earnings worldwide, and specifically address my speculations about earnings forecasts for 2009.
World Trade Is Falling Off a Cliff
Let's start with some charts from my friend Simon Hunt, out of London. The following chart shows World Merchandise Export Values and World Industrial Production falling off a cliff. This is the worst such period since the end of World War II. And as the data we will examine next indicates, it is likely to get worse. Simon notes that consumer spending is about 60% of world GDP, and it is not just in the US that spending is slowing down. Consumers all over the developed world are in shock, as assets such as stocks and houses, real estate, and commodities fall in value. Unemployment is rising.
We think that almost 2,000,000 lost jobs in the last three months in the US is a catastrophe. China lost a reported 20,000,000 jobs in the last quarter, and migrant workers came back to the cities after Chinese New Year to find factories and jobs simply gone. Unemployment is rising rapidly in Europe, as the demand for goods has clearly been falling since last October.
This means that inventories are too high, not just in the US but in factories all over the world, and that production is slowing down. Look at the recent US trade deficit. Many market analysts rejoiced that it dropped to a six-year low, just below $40 billion. But the internal numbers were not as positive. Exports are dropping faster than imports, as seen below. "After growing in every quarter during the last three years, real goods exports fell 34.9% at an annual rate, the worst performance in more than three decades." (www.dismal.com) And a falling deficit means that US consumers have to save more to balance out less foreign buying of US debt. There is no free lunch.
Let's look at a little bit of insider economics trivia. The US government first estimated that GDP last quarter was a negative 3.8%. I wrote when that number first came out that it would be revised downward.
When the government makes its initial forecast of GDP one month following the end of a quarter, it has to estimate what exports and imports were for the last month of the quarter. There is simply no data. For the 4th quarter of 2008, they estimated that the trade deficit would be about $34.5 billion, in line with what most economists thought. As it turns out, each $1 billion represents about 0.1% of GDP. So being off about $5 billion from the actual total of $40 billion subtracts another 0.5% of GDP from the previous estimate of -3.8%, taking it to a -4.3%.
Further, the government makes estimates about inventories which also affect GDP. When final numbers on real inventories come in, it will also add to the negative GDP estimate. Expect GDP to be in the range of a negative 5% for the 4th quarter, and the current quarter is likely to be almost as weak.
In the US, the leading economic indicators (LEI) continued to decline, but the leading indicators in the rest of the world were often much worse. (The chart below is again from Simon Hunt.) These are results from the OECD's analysis of the leading economic indicators for a variety of countries. Notice in particular how poorly Russia and China are doing! Also remember that the LEI is about how the economy is expected to be doing in six months, not what is going on right now. This argues that there is no real global turnaround in the picture before the end of the third quarter, at the earliest.
China has seen its year-over-year exports drop by 17.5% and imports by 43%. These are not signs of a healthy economy. That being said, China is massively increasing bank loans and other stimulus-type spending to try and offset the effects of the global downturn. But putting 20 million people back to work in a short time is a daunting task.
Japanese GDP was down by 9% (!) last quarter. Many of the largest corporations are seeing exports drop by 20-30% and are engaged in massive layoffs, larger proportionally than in the US. The euro area economy dropped by 6% in the 4th quarter, led by an 8.2% contraction in Germany (JP Morgan). I could go on and on, but the news is the same. The global economy is in a deep and worsening recession.
European Bank Losses Dwarf Those in the US
In a few paragraphs I am going to put up a chart from Nouriel Roubini's RGE Monitor on the size of US bank losses, and in a few pages I'll comment on the Geithner "plan" for rescuing US banks. We have indeed dug ourselves a very deep hole here in the US.
But European banks may be in far worse shape. Bruno Waterfield of the London Daily Telegraph reports to have seen an eyes-only document prepared by the European Commission for the finance ministers of the various EU member countries. The problem revealed in the report is an estimated write-down by European banks in the range of 16 trillion pounds, or about $25 trillion dollars! The concern is that bailing out the various national banks for such an unbelievable amount would push the cost of government borrowing to much higher levels than we see today.
As my kids would say, "Really, Dad, you think so?" Europe is somewhat larger than the US, so think what my gold-bug friends would say if the US decided to borrow $25 trillion to bail out US banks. The dollar would be crucified! The euro is going to get a lot weaker if bank problems are even half of what the report says they are. The British pound sterling is already off almost 30% and, depending on what the real damage is to their banking system, it could get worse.
Waterfield reports, "National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors -- particularly those who lend money to European governments -- have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.
"The Commission figure is significant because of the role EU officials will play in devising rules to evaluate 'toxic' bank assets later this month. New moves to bail out banks will be discussed at an emergency EU summit at the end of February. The EU is deeply worried at widening spreads on bonds sold by different European countries."
Part of the problem is that European banks were far more highly leveraged than US banks. Some banks were reportedly leveraged 50:1. And they lent money to Eastern European projects and businesses which are now facing severe financial strain and plummeting local currencies.
Let that number rattle around in your head for a moment: $25 trillion. Even $5 trillion would be daunting. But the problem is that Europe does not have a central bank that can step in and selectively save banks from one country without taking on all euro zone member-country banks. Yet, as noted above, some countries may not have the wherewithal to save their own banks. It is reported that some Austrian banks are hoping that Germany will step in and help them. Given Germany's problems, they may have a long wait.
Now, let's look at what Nouriel Roubini (www.RGEmonitor.com and professor at NYU) estimates for US banks losses. He puts the figure at some $1.7-1.8 trillion out of a total of about $3 trillion (I think) in total financial system losses. And Nouriel's base assumptions are not all that bearish, given what we know: a 5% GDP contraction and 9% unemployment, with housing prices down another 20%. All those estimates are quite plausible.
And a quick promotional plug: my next recorded "Conversation" will be with Nouriel and his staff in a few weeks. See the link at the end of the letter to make sure you get your copy.
Geithner: "You Can't Handle the Truth"
The critics were quick to pan Treasury Secretary Tim Geithner's bank bailout plan as being weak on details. Which was true. There wasn't much substance in his speech. But let me offer a contrarian view. Geithner and the team around him may not be entirely tone deaf. They are very smart people and are surely in contact with major Wall Street figures, and would know that the lack of detail would disappoint.
Pretty much everyone knows the scene from A Few Good Men, where Jack Nicholson tells Tom Cruise, "You can't handle the truth!" (www.youtube.com/watch?v=8hGvQtumNAY)
What if the number that the Treasury and the Fed are looking at is a lot more than the remaining $350 billion in the TARP program? As in another $1 trillion more, or even the $1.5 trillion that Roubini says may be out there (and other independent analysts, like David Rosenberg of Merrill, say there may be another $2 trillion in losses). Can you imagine what the market reaction would have been if they had announced that this week? The Dow down 400 points would have seemed like a Sunday walk in the park. Congress would be screaming, and the chances for the stimulus package to pass would have materially diminished.
I don't think we know the real extent of what it is going to cost to shore up the banking system. But the consensus among the financial leadership is that we have to fix the credit system no matter what the costs, or risk a repeat of the Great Depression. That is the essence of what Irving Fisher taught us some 75 years ago, when faced with a deflationary debt crisis.
Time for a Reality Check
Reality check: The "stimulus" that President Obama will sign Monday is a band-aid. If Irving Fisher, who by some accounts was our finest American economist, was right, such a stimulus is useful in that it helps those who are unemployed and replaces some lost consumer spending; but the real work that must be done is to get the credit system flowing again. I don't have the space to go into that economic debate tonight, but it is at the core of the problem. It is Keynes vs. Fisher, von Mises vs. Friedman. It is, as Lacy Hunt says, "The Grand Experiment." After 70 years, we are going to see who is right. My money is on Fisher. It is not an experiment that is going to be fun to live through; but when we have the next debt deflation in 70 years or so, our grandchildren may know what to do.
We will see another stimulus package, probably by the end of the year. This time it will hopefully provide real stimulus. Much of the current version is simply an increase in federal spending that will be hard to rein in. And please, I am not being partisan. That is the analysis of many of Obama's advisors. And it goes back to the debate I mentioned. Keynes would argue that it is in fact stimulus. The other three economists would have differing views. And like I said, in a few years we are going to know who was right.
But the heavy lifting is going to be done by the Fed. Watch their balance sheet expand. And watch Treasury and the FDIC come back and ask for massive amounts of money to take over very large insolvent banks. Stay tuned.
Earnings Will Get Even Worse
Last week I said that 2009 as-reported earnings estimates for the S&P 500 would be dropping. 2008 earnings had dropped to $29.57 as I wrote the letter. They are now down to $28.60. One of my favorite analysts is David Rosenberg of Merrill Lynch. His forecast for reported earnings for 2009 is now down to $28. That puts the P/E for the S&P 500 at 30.
He also projects "operating" earnings to be $55 for 2010. And, as he writes today:
"For those looking for a silver lining, at least we are going to have a deeper bottom to bounce off. Applying a classic recession-trough multiple of 12x against a forward EPS estimate of $55 would imply an ultimate low of 666 on the S&P 500, likely by October if our estimate of the timing for the end of the official downturn is accurate."
That is a 20% drop from today's close of 829. That is not what you will hear from "sell-side" managers who want you to invest in their mutual funds and long-only management programs.
I noted the problem with the rest of the world earlier. 40% of the earnings for the S&P 500 are from outside the US. It is hard to see how those earnings are not going to be deeply affected. Let me reiterate my continued warning: this is not a market you want to buy and hold from today's level. This is just far too precarious an economic and earnings environment.
Given the probable ongoing bad news from financial and consumer stocks, plus the depressing news on bank losses coming down the road, why take the risk?
John Mauldin
John@frontlinethoughts.com
Copyright 2009 John Mauldin. All Rights Reserved
John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore
Best Trading and Investing Advise
Get a clear grasp of how to become a professional trader
in about 2 minutes! No books to read, no studying. See
video link below and we will follow it up with a brief
discussion in the trading room:
VIDEO: http://www.puretick.com/video/success
**********************
This is the Best Trading and Investing advise
Simple.....how did I ever miss it?
David Ignatius: The Death of 'Rational Man'
Nouriel Roubini | Feb 13, 2009
From the Washington Post:
From the Washington Post:
What allowed some people to see the financial crash coming while so many others missed its gathering force? I put that question recently to Nouriel Roubini, who has come to be known as "Dr. Doom" because of his insistent warnings starting in 2006 that we were heading into a global firestorm.
Friday, February 13, 2009
US Govt Paper...What is it Worth?
“We are bearish on U.S. government paper in all its forms,” says Bill Bonner. “And here’s why. The latest estimate from Goldman Sachs puts U.S. government borrowing for this fiscal year at $2.5 trillion. Meanwhile, foreigners are showing less and less interest in U.S. debt. They’re switching to short-term paper -- bills and notes, which are less vulnerable to inflation and currency declines. And they’re pulling out of U.S. Treasury market generally. The total percentage of U.S. debt owned by foreigners is falling from 60% down to about 40%... a huge drop.
“Either one of two things will happen. If the government funds its deficits honestly -- by borrowing from willing lenders -- this huge extra demand for credit will force up yields... thereby lowering bond prices. Or if the government resorts to “monetizing the debt” -- that is, funding its debt with printing press money -- investors will flee bonds, in fear of higher inflation.
“Either way, it will be bad news for bond prices.”
************
US House on Leave
13 members of the House (and their spouses, assistants and security enclave) are leaving Saturday for a nine-day vacation… oh sorry, “delegation”… to Europe. They’ll stop at NATO headquarters in Brussels to talk about NATO’s role in Afghanistan. Then off to Paris, where we presume even the 10 spouses coming will meet with the OECD. Then Vienna for a meeting with the Organization for Security and Co-operation in Europe. Last, to Germany, where the group can meet with NATO again, this time to tour a new training facility.
Not one to miss out on the fun, Speaker Pelosi will leave for Rome tonight, presumably after the stimulus bill is passed. She’ll meet the Pope there and most of the Italian government, discuss Italy’s involvement in our efforts in the Middle East (say what?) and receive an award from an Italian legislative group. That’s great, really.
****************
Its really ghood to see US Congress members get a break / rest after all their hard work spending taxpayers money.
US Govt - Tilt - US $ will fall, US Govt Bankrupt
“A poker player would say the government is ‘on tilt,’” says the incredulous Doug Casey , “placing wild, desperate bets in the hope of getting rescued by good luck.
“The things they’re doing are not only unproductive, they’re the exact opposite of what should be done. The country got into this mess by living beyond its means for more than a generation. That’s the message from the debt that’s burdening so many individuals; debt is proof that you’re living above your means. The solution is for people to significantly reduce their standard of living for a while and start building capital. That’s what saving is about, producing more than you consume. The government creating funny money -- money out of nothing -- doesn’t fix anything. All it does is prolong the problem and make it worse by destroying the currency.
“Over several generations, huge distortions and misallocations of capital have been cranked into the economy, inviting levels of consumption that are unsustainable. In fact, Americans refer to themselves as consumers. That’s degrading and ridiculous. You should be first and foremost a producer, and a consumer only as a consequence.
“In any event, the government is going to destroy the currency, which will be a mega-disaster. And they’re making the depression worse by holding interest rates at artificially low levels, which discourages savings -- the exact opposite of what’s needed. They’re trying to prop up a bankrupt system. And at this point, it’s not just economically bankrupt, but morally and intellectually bankrupt. What they should be doing is recognize that they’re bankrupt and then start rebuilding. But they’re not, so it’s going to be a disaster.”
Common-sense Canada finds favour
Common-sense Canada finds favour
Prominent U.S. pundit praises banks, tax system, immigration
Canada's unsexy virtues -- a prudent banking system and fiscal responsibility in government -- are lavishly praised in the latest Newsweek magazine.
Aboot time, too!
And our dullest national trait -- common sense -- is singled out by influential Newsweek editor and columnist Fareed Zakaria as "the genius of the Canadians."
Such praise from a prominent American has us blushing right down to our sensible shoes. It's enough to make you celebrate with a bag of parsnip-flavoured chips, even though Hockey Night In Canada isn't on tonight.
Mr. Zakaria claims that Canada is in good shape to withstand the recession because it did not follow the U.S. and Europe, which loosened regulations on their financial industries over the past 15 years.
"Canadian banks are typically leveraged at 18 to 1 -- compared with U.S. banks at 26 to 1, and European banks at a frightening 61 to 1," he writes in a column.
"Canada has done more than survive this financial crisis. The country is positively thriving in it. Canadian banks are well capitalized and poised to take advantage of opportunities that American and European banks cannot seize."
Canada has been protected from the worst of this crisis because its housing prices have not fluctuated as wildly as those in the United States, he points out. "Home prices are down 25 per cent in the United States, but only half as much in Canada. Why? Well, the Canadian tax code does not provide the massive incentive for overconsumption that the U.S. code does: interest on your mortgage isn't deductible up north. Ah, but you've heard American politicians wax eloquent on the need for these expensive programs -- interest deductibility alone costs the federal government $100 billion a year -- because they allow the average Joe to fulfil the American Dream of owning a home. Sixty-eight per cent of Americans own their own homes. And the rate of Canadian homeownership? It's 68.4 per cent."
Mr. Zakaria goes on to suggest that Canada is well positioned to take advantage of the global downturn.
"Guess which country, alone in the industrialized world, has not faced a single bank failure, calls for bailouts or government intervention in the financial or mortgage sectors," he gushes. "Yup, it's Canada. In 2008, the World Economic Forum ranked Canada's banking system the healthiest in the world. America's ranked 40th, Britain's 44th."
Remember how Mom and Dad talked so much about responsibility? Canada has that going for it, too, says Mr. Zakaria.
"Canada has been remarkably responsible over the past decade or so. It has had 12 years of budget surpluses, and can now spend money to fuel a recovery from a strong position. The government has restructured the national pension system, placing it on a firm fiscal footing, unlike our own insolvent Social Security. Its health-care system is cheaper than America's by far (accounting for 9.7 per cent of GDP, versus 15.2 per cent here), and yet does better on all major indexes. Life expectancy in Canada is 81 years, versus 78 in the United States; 'healthy life expectancy' is 72 years, versus 69. American car companies have moved so many jobs to Canada to take advantage of lower health-care costs that since 2004, Ontario and not Michigan has been North America's largest car-producing region."
Mr. Zakaria also says the U.S. has "a brain-dead immigration system," compared with Canada's far-sighted immigration policy. While the U.S. kicks out thousands of talented grad students who want to stay and work in that country, Canada welcomes these talented migrants through its Skilled Worker Visa program.
"So the brightest Chinese and Indian software engineers are attracted to the United States, trained by American universities, then thrown out of the country and picked up by Canada -- where most of them will work, innovate and pay taxes for the rest of their lives."
Clearly, President Barack Obama should pay close attention when he visits Canada next week.
"If President Obama is looking for smart government, there is much he, and all of us, could learn from our quiet -- OK, sometimes boring -- neighbour to the north," concludes Mr. Zakaria.
We haven't felt this special since Robin Williams sang Blame Canada on the Oscars.
© Copyright (c) The Ottawa Citizen
********************
It is Common sense Principles and Values that help prevent making stupid risky decision.
It is common sense policies (taxes and spending) the builds an economy.
I do not think the US Congress has yet figured it out...they continue spending without regard.
Subscribe to:
Posts (Atom)