Category Archives: Economics

There’s Gloom and Then There’s Doom

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Gerald Celente of Trends Research Institute, who apparently correctly predicted lots of events like the 1987 stock market crash, the fall of Soviet Union, the 1997 Asian currency crisis and the sub-prime real estate market crash, had this to say to Fox News (via LiveLeak.com):


"We're going to see the end of the retail Christmas….we're going to
see a fundamental shift take place….putting food on the table is
going to be more important that putting gifts under the Christmas
tree," said Celente, adding that the situation would be "worse than the
great depression".



"America's going to go through a transition the likes of which no one
is prepared for," said Celente, noting that people's refusal to
acknowledge that America was even in a recession highlights how big a
problem denial is in being ready for the true scale of the crisis...


"There will be a revolution in this country," he said. "It’s not going
to come yet, but it’s going to come down the line and we’re going to
see a third party and this was the catalyst for it: the takeover of
Washington, D. C., in broad daylight by Wall Street in this bloodless
coup. And it will happen as conditions continue to worsen."



"The first thing to do is organize with tax revolts. That’s going to be
the big one because people can’t afford to pay more school tax,
property tax, any kind of tax. You’re going to start seeing those kinds
of protests start to develop."



"It’s going to be very bleak. Very sad. And there is going to be a lot
of homeless, the likes of which we have never seen before. Tent cities
are already sprouting up around the country and we’re going to see many
more."



"We’re going to start seeing huge areas of vacant real estate and
squatters living in them as well. It’s going to be a picture the likes
of which Americans are not going to be used to. It’s going to come as a
shock and with it, there’s going to be a lot of crime. And the crime is
going to be a lot worse than it was before because in the last 1929
Depression, people’s minds weren’t wrecked on all these modern drugs –
over-the-counter drugs, or crystal meth or whatever it might be. So,
you have a huge underclass of very desperate people with their minds
chemically blown beyond anybody’s comprehension."

I feel better now, don't you?  Maybe I'm being naive, but I just don't see it getting this bad.  Bad, yes, but not this bad.  Homelessness might get worse, but who profits from houses sitting empty?  Certainly not the creditors and certainly not the government.  There's literally a glut of housing right now and I think it's more likely that banks and other creditors would end up writing off losses and keeping people in homes.

And that last bit about a drug addled underclass?  Makes it sound like the invasion of the zombies doesn't it?  But he ignores the point that the major crime doesn't come from the drug addled underclass, but from the folks who traffic the drugs and control the drug markets.  So we might get more drug gang activity but I wouldn't worry too much about meth addicts invading your neighborhood.

Finally, revolution?  Maybe protests but America has a long way to fall before revolution will set in. Truth be told we could use some protests and some house cleaning in Washington and on Wall Street, but he's not giving Americans enough credit.  Our system, as messy as it is, has survived much harder times and will likely do so through my lifetime and that of my children's.

Wish He’d Been Wrong

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Want further proof that you should probably ignore the Wall Street "pundits"?  Look no further than the video below.  It's a tribute to Peter Schiff who was one of the few to accurately predict the market meltdown, and as you'll see in the video he did it in the face of scoffing and ridicule from the other pundits.  Of course Schiff could have been wrong, but he and Roubini seem to have been members of a very small group of economic prognosticators who got it right which in the reality of modern media means that they were barely heard.  The best advice when it comes to investments is thousands of years old: caveat emptor. (Hat tip to commenter Anthony at Ed Cone's blog for the link to the video).

Cuban: Entrepreneurs are the Future

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I'm a fan of Mark Cuban's, and not because I think he's a great sports franchise owner.  I like him because he speaks his mind, and he shares his thoughts with the world via his blog.  Here's a great example:

You can cut taxes for 95pct of Americans and raise taxes for the
rest. You can cut taxes for businesses and retain the Bush Tax Cuts.
You can increase or decrease the capital gains tax 5 or 10pct either
way.  Under both programs the deficit for the country will increase, 
we will borrow and print more money.  5 or 10pct variance either way,
given the big hole  our economy is in wont matter.

The cure for what ails is us the Entrepreneurial Spirit of this
country.  We are a nation of people who encourage , support and invest
in those of any and all age, race and gender who will use their
ingenuity and come up with a new idea.

Its always the new idea that re energizes this country.  Industry,
manufacturing, transportation, technology, digital communications, etc,
each changed how we lived and ignited our economy and standard of
living. Tax policy has never done that.  The American People have.

Entrepreneurs who create something out of nothing don’t care what
tax rates are. Bill Gates didn’t monitor the marginal tax rate when he
dropped out of Harvard and started MicroSoft (btw, it was a ton higher
than it is today). Michael Dell didn’t wonder what the capital gains
tax was when he started PC’s Limited, and then grew it into Dell
Computer.  I doubt that any great business or invention started with a
discussion or even a consideration of what the current or projected
income or capital gains tax was or would be.

It doesn't hurt that I often agree with him, but even when I don't I appreciate his putting it all out there.  It's almost as much fun as watching him get all the other NBA owners' panties in a twist two or three times a season.

Understanding The Bailout. Correct Me If I’m Wrong

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I'm not the sharpest knife in the drawer, especially when it comes to things related to money, so its taken me a while to get my head around this whole credit default swap thing and how it led to the big government bailout.  I began to understand when I was in San Francisco and I heard a speaker describe the market as a game of poker and CDS as everyone who was watching the game betting on the outcome on the side.  The game itself is worth $1,000,000 and the side bets are worth $80,000,000.  That analogy helped, but it didn't quite get me all the way to comprehension and I couldn't quite put my finger on the reason why.

Then yesterday I was watching 60 Minutes and they did a story on CDS, the second story on the subject they'd done just this fall which has to be some sort of sign about how big this mess is.  Anyway, one of the people interviewed used the side bet analogy, but he also pointed out that the bets were made by people who didn't have any money.  AHA!  Now I've got it.

So let's stick with the analogy.  Say you went to play in a poker tournament and you lost early in the night, but instead of going home to get nagged about losing you decide to stick around and see if you can make up some of your losses by betting on the side with the other losers.  You've got $50 in your pocket, but you're so sure you know that your best buddy who's won every basement game you've ever played is going to win the thing that you bet the chump next to you $1,000 that your buddy's gonna win.  The very next hand your buddy goes all in with three of a kind and gets hammered by an inside straight.  He's done and you now owe the guy next to you $1,000 and all you have in your pocket is $50.  You're looking at getting a severe ass-whooping if you don't come up with the other $950.  What do you do?

Well, you could sell your car but you just lost it in a game last week.  You could sell your house, but  you've already used it for collateral on several dozen work-at-home ventures.  You could borrow it from your buddy, but he's tapped out along with every other friend you have.  Besides, you borrowed money from him last week and now he's worried that not only will he not see any money he gives you now, but he has serious reservations about the money he gave you last week. In fact your whole group of friends is in hock to each other but nobody knows who has what, or who owes whom, so no ones lending any money at all.

What's left is your parents.  They've always been good for a bailout, and if you ever needed one now's the time.  So you call up Mom and Pop and they ain't happy.  They're still paying down the second they took on the house to pay for your lousy college education and now you're asking them to go dipping into their home equity one more time.  Luckily they have an open line of credit at the bank that even came with a convenient little check book. So they ask you to come over and sit at the kitchen table while they bitch slap you for 15 minutes, call you all kinds of dirty names and then ask you how much you need.  You think on it for a minute and decide that instead of aiming low and asking for $1,000 you'll see if you can't get them to give you $5,000 so you can pay off your debt and then have some left over for expenses.  They think about it for a while, and they say something about giving it to you if you'll agree to some conditions that they'd like to have their lawyer put into a contract, but you tell them that if you don't get the money tonight the guy you owe is going to kneecap you.  They think a little longer and then say they'll write you a check for $5,000 if you agree to sell them a stake in your house and if you "cross your heart and hope to die" promise that you'll take whatever is left over to help your buddies out.  After all they've always thought your buddies were fine young men, and if you help them out then maybe they'll pay it forward and everyone will start doing better.

Two weeks later you call call your parents from the Caribbean.  You've paid off your debt, filed for bankruptcy protection for your non-gambling creditors and now you're getting a little R&R on your favorite beach in the whole world and you just wanted to thank them.

Glossary:
You and your buddy = Investment Banks
Your house = Mortgage Backed Securities
Your side bet = Credit Default Swaps
Your parents = US Government
Your parents house = US Treasury
Your parents' debt = The US Debt

Real Estate Juxtaposition

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When we moved to North Carolina from Northern Virginia four years ago the real estate market here in the Winston-Salem area was one of the few in the U.S. that wasn't experiencing the bubble that the rest of the country was enjoying.  At the same time the real estate market in Northern Virginia was one of the most over-heated markets in the country.  Of course this worked in our favor at the time, but it's been interesting to examine the differences between the two markets during the current mortgage meltdown. 

In general both areas are down, but since Winston-Salem already had depressed real estate prices relative to the rest of the country it didn't have as far to fall as the DC area.  Still, I think in the near future DC has much brighter prospects than we have here in the Piedmont Triad area of North Carolina and two news items I read this week helped mold my thinking.

First, I was reading an article about Obama's surprising success in Virginia and in the article was this paragraph:

In Prince William County, about 25 miles south of Washington, residents
are watching neighbors head into foreclosure at a record pace. Nearly
one in 20 mortgages is in foreclosure there, the highest rate in
Virginia, according to the Virginia Housing Development Authority.

Prince William County is where we lived for the last eight years before we moved to North Carolina, and I can tell you that it's absolutely not surprising that it is experiencing such a bump in mortgage delinquencies.  In the early '00s houses were exploding in value but much of that was due to the fact that money was so cheap; any fool could get a loan with incredibly low ARMs. That made it possible for someone who could only qualify to buy a $200,000 home in the late '90s to qualify for a home in the $350,000 range just a few years later.  Well, guess what happened when those adjustable rates re-set?

On top of the cheap money Prince William also had the distinction of being an ex-urb that was more affordable than the suburbs closer to DC.  Add to that a set of political leaders whose governing philosophy can best be described as "build, baby, build" and you had the recipe for a massive real estate bubble.  Thank God we got out when we did.

Unfortunately for Winston-Salem it's still been a painful year despite not having as far to fall.  Just this morning the Journal reported that foreclosure filings in September were up 55% over September 07.  This area has seen hard times for years so relatively speaking the change in Prince William seems starker than the changes here. Believe me, when we left Northern Virginia that area felt like Northern California must have during the Gold Rush of 1849.  Housing developments sprang up seemingly overnight.  Traffic clogged every highway, and often many neighborhood roads.  People bought houses and flipped them months later for a tidy profit.  Heck it got so crazy that they tore down a prison and built townhouses, houses and a high school in its place. So when prices started to fall, it must have felt like Armageddon.

All that being said, the prospects for Prince William are probably much better than they are here, at least in the near to medium term.  DC's economy is historically insulated from experiencing the worst of economic downturns because of the recession-proof industry known as the federal government and government contracting.  Once the home prices have settled to a normal level there will be buyers because unemployment will likely be lower there than in the rest of the country.  And of course jobs will attract more people and eventually the housing glut will be filled, there will be a shortage of available homes and new homes will need to be built.  It might take a few years but mark my words that unless something truly catastrophic happens the DC area will see home prices rise before much of the rest of the country.

Here in Winston-Salem things will take longer.  Yes our housing prices didn't have as far to fall, but we still saw lots of building that happened thanks primarily to cheap money over the last few years.  Consequently we have a rather large housing inventory.  Unfortunately we're also bleeding jobs, a continuation of the decline of the textile, furniture and tobacco industries that started well over a decade ago and an impending decline in jobs related to the current economic meltdown.  The region is actively pursuing new industries, but it's going to take a while for them to get rooted and growing. In other words even as the housing prices settle we're not going to have a lot of buyers in the near term so the lower housing prices are likely to be with us for a longer period of time than in other parts of the country.

You might think that I regret the move.  Well, that couldn't be further from the truth.  Life is a marathon, not a sprint, and I'd take the environment here over the DC region any day.  Our standard of living is quite high with little traffic, affordable housing (obviously), easy access to the mountains, the beaches only a couple of hours away, a decent education system, easy access to the I-40 and I-85 highways, a leading private university (Wake Forest), two state universities (University of NC School of the Arts and Winston-Salem State University), one of the oldest colleges in the country (Salem College) and a well run local government.  Eventually there will be a lot of companies that will discover the benefits of this area and I'm confident that within the next twenty years this will be a very strong economy.  Honestly you can't lose the majority of your industrial base and expect to replace it overnight, but when you have as many positives as we have it's only a matter of time before you see the positive effects.

The timing should be just about right for us.  We'll be able to make a killing on our house and then I can buy that Winnebago and Celeste and I can see the country in our old age.  I'm sure she can hardly wait.

WTF Wall Street?

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Those who have been skeptical of the big bailout, or The Splurge as some call it, had more reasons to be skeptical than they thought.  Congress puts us on the hook for a bazillion bucks and the schmucks on Wall Street may say, "Thanks, but no thanks."  From The Guardian:

Last Monday, after the bill was thrown out by the House of
Representatives, more than $1 trillion was wiped off the value of US
stocks as the market was gripped by panic. The bill was passed on
Friday afternoon, however, after the inclusion of $149bn of tax breaks
and strict rules for participating banks.

But Wall Street analysts, believe the addition of so many terms to the bill might deter potential participants.

One
of the least attractive elements is a section designed to curb
executive pay at banks that participate in the bail-out package. These
include limiting stock-related pay and banning ‘golden parachutes’ for
executives.

‘I think this hodge-podge of regulations and rules
will be enough to put many [chief executives] off participating,’
Caldwell said.

Sources close to Goldman Sachs and Merrill Lynch
indicated the banks might choose not to participate in the bail-out as
there is a growing view on Wall Street that the market may be bottoming
out.

Analysts also believe that the mere presence of the government as buyer
of last resort will be enough to get credit markets moving again, and
that a large number of banks would not need to take part for the
legislation to succeed.

In other words there’s the possibility that the pinstripe and wing tip set might find their balls and actually figure out a solution to the "impending financial doom" if their gilded lifestyle is seriously threatened.  Am I the only one who fantasizes about seeing these goobers seated around Al Capone’s conference table like in The Untouchables?  Forget taking away golden parachutes, let’s start playing baseball with these jerks.

Credit Default Swap

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I just finished watching 60 Minutes’ latest piece on the financial crisis.  The focus was mostly on credit default swaps (CDS) and why and how they caused most of the problems in the financial markets.  I still think the best description I’ve heard of the role CDS’s play in the grand scheme of things is something I heard at the Frost & Sullivan event in San Francisco a couple of weeks back.  It was part of a presentation by James Anderson, President of SVB Analytics (SVB stands for Silicon Valley Bank) and I think it’s good enough that I want to post it again here:

Credit default swaps: Think of the market as a $1
million Texas Hold ‘Em game being held in a Vegas casino with a room
full of spectators.  All of the spectators start placing side bets on
which player will win, and eventually the amount of money in the side
betting is $70 million vs. the $1 million that’s at stake in the actual
game.  Credit default swaps are the side bets.

BTW, one of the people interviewed in the 60 Minutes piece said that the CDS "shadow market" is estimated at somewhere between $50-60 trillion, but that estimate is based on information garnered from a voluntary survey.  Since the CDS market is unregulated no one really knows for sure exactly how big the market is, which of course is scary as hell.

Finally, I need to tip my hat to Fec.  I first heard of credit default swaps when he started looking into them earlier this year. Here’s a link to the 9 (so far) posts that he has on the subject, beginning in January, 2008.

Wake Forest to Host Panel Discussion About Financial Crisis

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If you’re interested in hearing what folks like BB&T’s chairman and CEO John Allison think of the current financial crisis then you should check out the free public panel discussion titled “Exploring Today’s Financial Crisis: Business, Politics, Ethics and You”  that Wake Forest is hosting this Friday (October 3, 2008) at 4 p.m. at the Scales Fine Arts Center.  Other panelists will include PNC Bank managing director Reggie Imamura and several Wake Forest professors.  From the news release:

Banking industry panelists will be John Allison, chairman and chief
executive officer at BB&T Corp. and Reggie Imamura, managing
director at PNC Bank.  Panelists from Wake Forest University will be
Sheri Bridges, associate professor of marketing at the Calloway School
of Business and Accountancy; David Coates, professor of political
science; and Alison Snow Jones, associate professor at the School of
Medicine’s Program in Bioethics, Health and Society.

Moderators will be Bill Marcum, associate professor of finance at
the Calloway School and Rob Nash, associate professor of finance at
Wake Forest’s Babcock Graduate School of Management.  To promote
informal dialogue among the panelists, a moderator-led
question-and-answer format will be employed.  The two-hour session will
include time for questions from the audience.  Dean of Business and
Professor of Leadership and Strategy Steve Reinemund will offer opening
and closing remarks.

You may recall that John Allison is the banking executive who wrote a letter to Congress about the bailout that garnered just a little attention.

Best Bailout Quote Yet

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I have a perfect example of why I don’t consider myself a very good writer.  Last week I spent lots of bytes trying to explain why I thought that the bailout proposal should be questioned because the administration, a.k.a. The Powers That Be, has spent the last eight years submarining the public trust in America.  Well, if I wrote worth a damn I’d have come up with a paragraph similar to The Cunning Realist’s:

Part of the
public’s skepticism is a natural reaction to the now-transparent
language of deception and hysteria. When you’ve trafficked in mushroom
clouds and Persian Hitlers for eight years, "imminent financial
Armageddon" loses a bit of its edge. Hearing the administration and its
media flacks suddenly and in concert (almost as if a memo went out,
eh?) warn of a latter-day Great Depression and push this as "it’s not a
bailout, it’s a buy-in" sets off alarm bells for anyone who’s been
sentient in recent years. Orwell’s revenge, maybe. Also, I don’t think
the plan’s Goldilocks-invoking supporters help their cause by trying to
convince the public it doesn’t understand the financial system well
enough to know what’s at stake. Somehow they had faith that people were
"smart enough to reject the pessimists" on the way up.

Hat tip to Ed Cone for the link.

Civics 101

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One of the advantages of working at home is that when I take a lunch break I can whip up a quick bite to eat in my own kitchen and then plunk myself down and read the paper or watch the news on TV.  Today I took a late lunch around 1:40 and snapped on CNBC to see what was going on in the market and with the government bailout.  What I saw was fascinating on multiple levels.

First, I saw the bailout vote appear to fail which caused the DJIA to plummet 300 points in about five minutes.  It was nuts and it was something I’ve never seen before, but I was even more interested in watching and listening to the Wall Street pundits react.

What became apparent very quickly is that as smart as these people were about markets they were equally dense in the ways of Washington.  They had no clue how Congressional votes worked.  Luckily they had a reporter that could explain what it meant to leave the vote open and how it was possible for votes to change even after they’d been cast. That news caused the Dow to recover a couple of hundred points.

Then it got really good.  They decided to listen to the House vote live and they came in just as a member of the House asked a parliamentary question and asked the Chair for guidance.  Well I think that caused the commentators’ heads to spin off because when the vote was actually closed a few moments later and the House moved on to another bill they didn’t realize it. They had to wait for an explanation from the reporter and once they got it and relayed it to the audience at large and the Dow and other equity markets took an instant plunge.

I don’t expect people who normally don’t cover government to know every intricate detail or parliamentary procedure, but if I knew I was going to be covering one of the most important stories of the day as it affects my area of expertise I’d make sure I understood at least the fundamentals of how things proceed on the Hill.   It’s pretty obvious that didn’t happen in this case.

I don’t want to be too critical of the financial pundits. Their day-to-day existence requires they be highly versed in finance, not in government.  However, I do find it interesting that they were temporarily flummoxed by things they should have learned in high school civics class. 

For what it’s worth I’ve found CNBC to be some of the best television news going these days. It’s not perfect by any stretch of the imagination, but it’s head and shoulders above the rest of the "news" channels.  Watching CNN gives me nausea, MSNBC and Fox should drop any reference to news since they’re essentially televised versions of the Daily News, and the networks are pretty much DOA.  I like public television for the overall news, but CNBC seems to be the best for business and finance.