Posted by Michael A. Kamperman on February 8, 2010
The Dow Jones closed below 10,000 as investors are becoming increasingly nervous about the ability of governments to step forward and solve the economic crisis. Global economies cannot revive unless significant amounts of additional government spending continue to take the place of private sector spending. However, governments cannot cut deficits and support the global economy with higher spending at the same time. The crisis surrounding the debts and deficits of Greece, Spain, and Portugal expose Europe as leaderless and rudderless. Now is not the time to ask Greece, Spain, and Portugal to accept fiscal austerity and more economic pain. Yet that is exactly what Europe’s leaders are doing. The U.S. remains equally leaderless and rudderless as the states are asked to swallow the same type of bitter fiscal austerity pill by the Whitehouse and the Congress. Global governments appear frozen and incapable of stepping up and meeting the challenges that face us. Confidence is always fragile. No one in a leadership position is capable of putting Humpty Dumpty back together again. Money is heading back under the mattress. Let’s be clear, nothing has been fixed. The credit markets remain broken. Sleight of hand statistics like those used in the unemployment report are not working any more. People are waking up and realizing that the unemployment rate went down to 9.7% because we have thrown more workers out of the want to work bad enough category, not because we actually created jobs. The Labor Department reported we have the same number of Jobs in January as we did in November, yet the unemployment rate dropped from 10% to 9.7% despite population growth. Weekly unemployment claims started rising again before the loss of confidence even swept the markets. Now there is a very good chance the momentum to fire more workers will gather steam.
Our country has over 6 million people that have been out of work for over 6 months. Where is the plan to put all of them, that’s right all of them, back to work? Cutting taxes isn’t going to do it. A feeble $100 billion jobs bill isn’t going to do it. Faith in the markets isn’t going to do it. We need to see a real plan. So far no leader in Washington has put forward a comprehensive plan to put America back to work.
In 1931 there was false optimism the economy stabilized and the worst was over, then the next big leg down in the economy hit and eventually drove the unemployment rate to 25% in 1933. It appears the next leg down in our economy has begun. The global economy cannot be sustained without significant increases in global government spending. Spending cannot continue without large deficits. The solution is to print money to reduce government debts and increase government spending at the same time. No leader is currently advocating this. Both the Bank of England and the Federal Reserve have naively backed away from quantitative easing. What our leaders fail to see is first they came for the Gypsies, then they came for the Jews, then they came for us. First the deficit hawks are coming for Southern Europe, then…
Posted by Michael A. Kamperman on January 27, 2010
President Obama has decided he needs to distance himself from the Too-Big-to-Fail taxpayer bailed-out Zombie banks. Politically speaking, who can blame him? But there is a difference between campaign rhetoric and policy. The President’s is embracing former Fed Chair Paul Volcker’s quest to separate out taxpayer backed deposits from riskier strategies such as proprietary trading, private equity investments, and hedge funds. It would be nice to go back to the Glass-Steagall era, but that ship has sailed. The age of financial innocence is over and it is not coming back in our lifetime. After the disorderly Lehman Brothers bankruptcy no Treasury Secretary or Federal Reserve Chairman will allow a large financial institution to go under in a non-planned, chaotic, your on your own buddy way. Too-Big-to-Fail means that if an institution goes under it is large enough to drag multiple other institutions under with it setting off a domino effect. What the President should propose are regulations that allow the Treasury and the Federal Reserve to close financial institutions in the same way they can close FDIC insured commercial banks. The federal government needs to be able to seize all assets of an insolvent financial institution, wipe out the shareholders, and sell the assets to another institution who will guarantee the firms accounts and counter-parties.
What is disconcerting is that by embracing the Volcker position the President is indicating he doesn’t understand the root cause of the financial crisis, and therefore he doesn’t understand what needs to be done to fix it. Proprietary trading is risky, private equity is risky, and hedge fund trading strategies are risky. But none of these activities caused the credit crisis, and none of these activities create systemic risk. Systemic risk comes from a system that is too highly leveraged so that when an unforeseen crisis arises the financial institutions don’t have enough capital to ride out the storm. The cause of the current credit crisis has already been fixed. The markets fixed it. The cause of the crisis resulted from lenders being able to make loans and then sell the loans for a large profit with no ongoing risk if a loan wasn’t repaid. But the AAA rated asset-backed securities market imploded and now if you make a loan you bear the risk of that loan. Hence, the pendulum has swung from loans being too easy to get to being too hard to get.
The President needs to focus on restoring normal credit conditions to small businesses and consumers. The President should leave the structure of banks alone and simply insist they carry more capital compared to their assets and he should insist they start to lend again. Creating uncertainty is no way to encourage banks to take on the risks of new loans. Lending is more likely to happen if an institution is well diversified and can rely on profits from non-lending activities to cushion potential losses from lending activities. I can’t believe that President Obama has backed me into a corner where I have to defend the Zombie banks. What we need is lending, lending, lending rather than extending and pretending. We will not create jobs until small businesses and consumers can access capital. The President should come out in favor of creating a “bad bank” to absorb the toxic assets on the books of the banks. This is the only way to return the Zombies to the land of the living.
Posted by Michael A. Kamperman on January 11, 2010
The consumer is getting the shaft in the Fed’s zero percent interest environment. Consumer credit fell by over $17 billion in November, which is part of the all-important Christmas shopping season. But what’s even more disturbing is the federal government is allowing the tax payer bailed out too-big-to-fail banks to get away with highway robbery. Big banks have raised the interest rates on credit card customers who are current on their bills up to 30% in some cases. We already have a huge problem in that many consumers cannot access credit. But many who can access credit are getting gouged. There is simply no acceptable reason for banks to be allowed to charge usurious interest rates when the Fed is letting them have money almost for free. The Fed’s policy of low interest rates is working to give the banks a chance to earn some income to cover their swept under the rug losses. However, the Fed’s low interest rate policy is failing to jump start the economy because the consumer is not seeing the low interest rates passed on to them, except for home mortgages. But most people cannot buy a new house because they can’t sell the house they live in and they cannot refinance because their current mortgage is underwater. Hence, this is having a limited impact on reviving the economy. The consumer’s inability to access affordable credit is paramount to a contraction in the money supply. Since the money supply is already contracting without factoring in the interest rate differential, the risk of persistent deflation rises daily.
The Federal Reserve needs to quit talking nonsense about an exit strategy and needs to get serious about printing a lot more money. There is no way the housing market will survive if mortgage interest rates rise further. That is all but certain to happen if the Fed ends its purchases of mortgages under its current quantitative easing program at the end of March. Nero fiddled while Rome burned. Right now the Obama Administration is fiddling while the consumer is being burned alive. It is up to Ben Bernanke to stand up and be counted. History calls.
It is also up to Congress to stand up and be counted. The recent “consumer protection” bill left a multi-month window for banks to abuse the little guy. And boys have they. Do they not realize that 70% of the U.S. economy is based on consumer spending? Do they not realize the consumer votes? Senator Dodd pushed this legislation through and now he has been pushed out. President Obama needs to call for change. He needs to call for change we can believe in. This economy is going no where if the consumer is not given a life-line, pronto.
Posted by Michael A. Kamperman on January 6, 2010
The economic crisis is best thought of as a bursting construction bubble in both residential and commercial properties. For perspective on when we get out of this consider that after the bursting of the NASDAQ bubble that index still trades ten years later for less than half of its all-time highs. It will take a generation or longer for residential and commercial properties to approach the high prices they reached after the height of the no credit, no job, no money down, no worries mate you got a McMansion mania. In November construction spending fell again and is now down 13% from November of 2008. Homes sales slowed markedly in November once the first time home buyers tax credit expired for the first time. Millions of more foreclosures are on the way. On the commercial side there is a glut of empty retail space, office space, hotel space, and warehouse space. And unlike the tech companies that took it on the chin ten years ago it is highly unlikely new innovations will render any of these properties obsolete any time soon and in need of replacement to revive the construction industry. Spain, Ireland, and a host of others headlined by Dubai are also massively overbuilt. Many of the barely more than interest only mortgages backing these overpriced properties have not been written down by the Zombie banks. After all why not extend and pretend instead of fix and lend as long as the bonuses keep coming.
Unlike the NASDAQ bubble there are a lot more jobs on the line this time. Many of these jobs will be gone for a generation or more because the buildings are not going anywhere. When we think about bringing the 10% unemployment rate down we need to realize the jobs lost in construction are not returning. The construction industry includes a lot more than carpenters and electricians. It includes mortgage bankers and lawyers, realtors, architects, interior designers, and manufacturers of building materials. It also includes peripheral jobs making pick-up trucks and running a lunch wagon. Most of these jobs are very good paying jobs and even if we find another job for the laid off worker the new job will probably pay half of what they were making in the construction industry. This of course impacts consumer spending and will cost jobs in a host of other industries including retail and food service.
The Obama Administration is failing to provide the big bang stimulus programs needed to shock and awe the economy back to stability. This is unforgivable and Geithner and Summers need to go. Construction spending is down 13% from a year ago and falling and these knuckleheads are trying to spin us that the economy is growing again. But what is much more important is the economic GDP worshipping technocrats President Obama has surrounded himself with do not grasp the depths of our economic despair and are devoid of the vision thing. We need somebody in Washington who can see the dilemma our nation has fallen into. Exactly how are we going to redeploy the army of well paid construction workers? Do where tear down older obsolete buildings to keep the construction industry thriving? Do we innovate a new industry to absorb the millions of unemployed construction workers and at what pay-scale? Or do we alter our social contract and make retirement at earlier ages more palatable to open up jobs for younger workers? Personally I believe we should employ all three strategies simultaneously. Is the Obama Administration even discussing the need to discuss a strategy?
Posted by Michael A. Kamperman on December 31, 2009
1. The banks are hiding losses and are feverishly downsizing to maintain their capital ratios. Extremely tight lending standards will continue to crimp the ability of consumers and small businesses to borrow and spend in 2010.
2. The Obama Administration is focused on reducing the federal budget deficit. They believe the forecasts calling for an economic recovery next year. Hence, there will not be a new major stimulus program passed in the first half of 2010.
3. Residential real estate prices will continue to decline next year. The plunge in November new home sales showed what will happen to the housing market when the benefits of the tax credit are removed. The extension of the tax credit is set to expire at the end of April, just when the selling season begins in earnest.
4. State and local budgets will continue to be squeezed by declining tax revenue. The federal government will not bridge the deficits even with the stimulus money focused primarily on providing aid to states, municipalities, and school districts. New York has joined California in the ranks of states with a serious budget crisis.
5. Many of the unemployed are running out of money. Millions of people who have been hanging on by a thread will slip into extreme poverty in 2010. The continued spending from savings and extended unemployment benefits will cease.
6. Deflation has gained a global foothold in almost all of the industrialized economies. Should a V-Shaped recovery fail to materialize there could well be a significant sell off in most economically sensitive commodities significantly exacerbating deflationary pressures.
7. Concerns over Sovereign debt kicked off by Dubai and quickly spilling into Greece will spread. This will force national governments that have been propping up spending and bailing out banks to retrench.
8. Beggar thy neighbor strategies are rapidly spreading as protectionism naturally gains sway. The U.S. has already entered into a tariff tiff with China; first over tires and now over steel.
9. Political uncertainty in the U.S. surrounding the impact of the health insurance bill, the potential impact of global warming legislation or regulation, and the possibility of a change in the balance of power in Congress after the mid-term elections will leave business leaders cautious during the duration of 2010.
10. Confidence remains low despite all of the Kings Horses and all of the Kings Women trying to put it back together again. Should several of the above trends worsen confidence could collapse completely in 2010….what then?
Posted by Michael A. Kamperman on December 19, 2009
It’s been a rough few weeks for the Obama Administration. Healthcare legislation hangs by a thread in the Senate. The President had to personally broker a non-binding deal with no specifics on global warming with the Chinese and then fly ingloriously home early in order to beat the largest snow storm to hit D.C. in years. Yet nothing may throw a fly in the Presidential ointment more than the sudden resurgence of the dollar. The Obama economic advisers led by Geithner and Summers have convinced President Obama that the best way to create jobs is to become more like China by consuming less and exporting more. The easiest way to mimic China is to devalue the dollar against all other major currencies, including the Chinese yuan. Yet China stiffed the President on his request to let the value of the yuan rise against the dollar. Now the markets are stiffing the Administration’s grand plans to let the dollar slide thereby juicing exports because of the realities of the global economic meltdown. Dubai kicked off a global re-evaluation of the fundamental soundness of sovereign debt and suddenly the dollar looks like gold compared to the euro, the yen, and the pound.
In Europe the situation in Greece is rapidly deteriorating. The costs of issuing new Greek debt is rising fast. The people have taken to the streets in the form of “demonstrations.” The credit rating agencies have just lowered the rating on Spanish backed mortgage bonds. Spain has over 1.5 million empty homes, the highest per capita ratio in the world. Ironically Spanish banks were one of the few to avoid saddling themselves with American subprime mortgages, yet have saddled themselves with their own Spanish mortgage nightmare. Austria has had to nationalize banks with deep ties to the troubled Eastern European economies such as Hungary. Suddenly the world is looking at the euro and they are not seeing Germany and France, they are seeing Greece, Spain, Austria, Italy, and Ireland. Japan is mired in deflation with an aging population and federal government debt close to 200% of GDP. The cost of issuing 10 year Japanese debt is suddenly rising as well. In Britain, for the first time ever tax receipts were less than one billion pounds over the costs of social programs alone leaving almost nothing for defense, infrastructure, and interest on the debt. Comparatively, the U.S. looks like the land of milk and honey.
The Obama Administration had better wake up. We need to re-ignite internal demand in the U.S. and not count on Spain, Greece, Britain, Japan, and Dubai to buy more goods and services from us. The latest word is the President is willing to use about $30 billion of unspent TARP funds to bolster small business lending. While this is a step in the right direction, $30 billion is but a pittance compared to the $2 trillion of capital cut out of credit cards and the constant closings of community banks that loaned hundreds of billions of dollars directly to small businesses. Never mind the too-big-to-fail banks allowed to escape the TARP so executives could be paid more while the banks lend less. Small businesses create 75% of all of the new jobs in America. President Obama needs to quit thinking small and start thinking big. For starters he should tell Geithner and Summers to not let the door hit them in the back on their way out. He should forget about deficit reduction. He should take all of the remaining TARP funds and create a Small Business Bank of the United States. This government owned bank could then leverage $300 billion into $3 trillion worth of loans to small businesses. Now that would be change we could believe in.
Posted by Michael A. Kamperman on December 16, 2009
The Bernanke led Fed is divided. Some want to render more aid to the economy now. Others wish to withdraw support and head off future inflation. Both sides have agreed in a grand bargain to wait for more data and to wait until they have to make a real decision. The deadline is March 2010 when the current round of quantitative easing is scheduled to end. That is when the Fed is scheduled to end its purchases of Agency debt and of Agency issued mortgages. Until then they neither have to end or extend quantitative easing. The Fed is watching unemployment and capacity utilization. Between now and the end of March the private sector and the state governments will shed more jobs. The predictions by the leading economists are for the real economy to begin to add private sector jobs in the first quarter of 2010. It’s not going to happen. What is going to happen is the federal government will add almost one million temporary jobs to work on the 2010 census. But all of these jobs will end at the end of 2010. The Fed needs to back these jobs out of the next few unemployment reports to get a clear picture of where the economy is heading. Otherwise they may make a decision based on a false reading of economic vitality.
The CPI report showed the core rate of inflation is currently zero. This in spite of the dollar declining gold led rise in November oil prices. That trend has already reversed and the dollar has bottomed in the near term. It’s not because the U.S. is doing so much better. It’s because the veil has been lifted on the euro and the reality of the economic calamity facing countries like Greece, Spain, and Ireland has been laid bare. The CPI reports will soon trend negative. It is only the cold winter that is holding keeping the price of oil from collapsing. It is certainly not economic activity.
The Fed is definitely behind the curve. But it is not the inflation curve they are behind, it is the deflation curve. Prices will keep falling in housing and real goods in search of demand. The banks continue to tighten credit. The Obama Administration has chosen politics over economic substance in allowing Bank of America, Citi Group, and Wells Fargo to exit the Tarp. Despite raising money the capital ratios of all three of these firms fell when the Treasury redeemed its preferred stock. The deleveraging continues and even fewer loans will be lent to consumers and small businesses in 2010, despite the pleas from the President. The Fed needs to look at the big picture and needs to quit waiting and start printing more money ASAP. Manufacturing activity is already slowing down in the U.S., Germany, and Japan. And Christmas sales at the retail level are looking to be weaker than expected. Come January the false dawn of economic revitalization will become self evident and the Fed’s hesitancy will cost it valuable points in confidence. If the Fed had moved today to up their quantitative easing program businesses may have had the confidence to keep workers on and perhaps even to attempt to expand. But because the Fed is blinking employers will blink too. Unfortunately the Obama Administration is not only blinking on job creation, they are blind.
Posted by Michael A. Kamperman on December 13, 2009
The readings on the economy are tricking policy makers into thinking the economy has bottomed and a slow recovery is under way. But this false optimism is based on misreading the tea leaves. The recent readings on the economy such as GDP, the November unemployment rate, and the November retail sales report are signaling to policy makers that all is calm. They are misinterpreting this to mean the coast is clear. In fact the economic reports are flawed and are disguising the second half of the storm that will soon hit in full force driving the economy down in what has come to be known as a double dip. The growth in third quarter GDP benefited almost exclusively from an auto industry that had practically shut down in the second quarter and got a boost from cash for clunkers. The November unemployment report was a rogue number not supported by any other measure of the nation’s unemployment rate. Finally, the growth in retail sales is based on higher gasoline prices and not on an increase in demand for more gallons of gasoline. Imports of oil in the U.S. have declined by over 1 million barrels versus a year ago. Ironically the lack of demand for imported oil is considered a sign of economic growth in the GDP report, go figure. Reality will soon bite hard as the credit collapse enters phase II tomorrow.
Dubai is under the gun and will probably allow Dubai World to default on $3.5 billion worth of bonds. This wake-up call has forced the rating agencies to stop seeing no evil and opening their eyes to the risks of the debt of some countries like Greece. These countries are not Zimbabwe, nor Iceland, and the problems they are facing are legion throughout the world. On the Main Street stage the big banks acknowledged they are shrinking their loan portfolios to small businesses and consumers in an attempt to deleverage. We enter 2010 in worse economic shape than we entered 2009.
How will the Obama Administration respond in an election year if the economy heads south? They have backed themselves into a corner by declaring the recession is over and by declaring every positive signal in the economy as a sign the failed stimulus bill is working. Does President Obama have the political courage to go back to Congress and say he and his team were wrong and the economy needs a lot more federal spending when he has been out preaching the virtues of deficit reduction ala Hoover in the middle of a depression? I hope so, but I doubt it. Instead I look for 2010 to be a year of significant political and social upheaval as rising unemployment frays the fabric of American society. There are rays of hope. Paul Krugman has kick-started the conversation about the benefits of the Fed printing money to lower unemployment. Additionally, Harry Reid has kick-started the conversation on lowering the eligibility age for Medicare. The genie is out of the bottle on both of these once taboo subjects. Printing money, lowering the retirement age, and fixing the banks for good are the three keys to ending the depression. As they say two out of three ain’t bad.
Posted by Michael A. Kamperman on December 11, 2009
In this morning’s New York Times Paul Krugman called on Ben Bernanke to ratchet up the Federal Reserve’s efforts to create jobs by printing $2 trillion. Krugman says the economy needs to create 300,000 jobs per month for the next five years in order to create the 18 million jobs necessary to return to full employment. The Keynesian econonomist ruefully acknowledges the appetite for a full scale fiscal assault on the economic crisis doesn’t exist in Washington and he is turning to Bernanke and monetary policy as the nation’s best option to create jobs. Krugman states “the most specific, persuasive case I’ve seen for more Fed action comes from Joseph Gagnon, a former Fed staffer now at the Peterson Institute for International Economics. Basing his analysis on the prior work of none other than Mr. Bernanke himself, in his previous incarnation as an economic researcher, Mr. Gagnon urges the Fed to expand credit by buying a further $2 trillion in assets. Such a program could do a lot to promote faster growth, while having hardly any downside.” While Joseph Gagnon is on the right track he underestimates the size and scale of quantitative easing necessary to end the credit crisis. Consider that Goldman Sach’s estimates that every $1.4 trillion worth of government securities the Fed purchases is equivalent to lowering the Fed Funds rate by 1%. Goldman further estimated the Fed Funds rate needs to be lowered another 6% in order for monetary policy to have enough teeth to get the economy moving again. The Goldman study estimates the Fed needs to print $8.4 trillion.
While I think Mr. Gagnon’s estimate is way too low and that Goldman’s estimates are also too low I am thrilled that Professor Krugman has kick-started the debate about why isn’t the Fed printing more money and just how much money does the Fed need to print. My own estimate is we should start with $10 trillion, though it will probably take $20 trillion, and virtually eliminate all of the outstanding U.S. Treasuries. This shock and awe strategy would restore confidence because the federal government would be almost debt free. It would also mean our President wouldn’t have to go to Asia and bow down before his bankers. And, it would free the Congress from concerns about the deficit allowing them to send the states the estimated $350 billion they will need over the next two years to close their budget deficits.
Imagine a world where the too-big-to-fail-too-yet-too-broke-to-lend-banks have no risk free Treasuries to invest in and are forced out on the risk curve with no option but to lend again? It is up to the Fed to take the “hide the money under the mattress” Treasury bonds away from the institutions. We have seen several Treasury auctions this month where the winning bidders accepted zero interest just to know their money was safe. One auction had demand for over five times the amount of Treasuries auctioned even though there was no interest to be earned. If I ran an institution I wouldn’t want my money in a maybe too big to fail bank, or in Dubai or Greece either. For those worried about the dollar if the Fed takes the plunge you can bet the Japanese and the Brits will be quick to follow. We are in a global debt-induced deflationary depression and it is up to the U.S. to lead the way out. Mr. Bernanke, to whom much is given, much is required.
Posted by Michael A. Kamperman on December 9, 2009
President Obama has decided to use the $200 billion in unspent TARP funds to fund his jobs initiative and to reduce the deficit. The TARP fund is growing as the Treasury has allowed Bank of America, and will soon allow Citigroup and Wells Fargo, to repay the TARP funds they received. The President wants to focus on capital gains tax cuts, jobs tax credits, home insulation tax credits, increased SBA funding for small businesses, and some further aid to the states for shovel ready infrastructure projects as his main thrust on improving the unemployment picture. The Administration continues to argue the stimulus plan has been successful and has generated 1.6 million jobs, which is true as long as one closes their eyes and ignores the 7 million jobs lost and the failure to create the additional 3 million needed jobs to keep up with population growth. Another major stimulus plan is not in the cards. The President’s jobs plan is focused on politics and not on economics. The President wants to argue the stimulus plan was a success, that he is concerned for the unemployed and willing to provide some additional aid, and that the deficit will be reduced by returning some unspent TARP funds. The problem is the Treasury is allowing the banks to repay TARP by delevering their balance sheets by shrinking their loan portfolios. Hence hundreds of billions of dollars are not being lent to small businesses and consumers so these banks can repay their TARP funds. This is just one more example of coddling Wall Street at the expense of Main Street. It would be much better for the economy to force the banks to keep the TARP funds and lend them rather than to have them returned and to put forth wasteful job creation ideas like an employers tax credit and a cut in the capital gains tax. The vast majority of these tax benefits will go to successful companies that were going to hire people anyway.
Meanwhile, the Administration needs to understand the federal government’s economic actions are not occurring in a vacuum. The states are projected to run budget shortfalls of over $350 billion in 2010 and 2011. The size of the additional inefficient federal spending for jobs is only a fraction of the size of the cuts coming from state and city governments. The loss of bank credit for small businesses combined with job cuts from state and local governments dwarf the size of the additional help President Obama is offering with his minimalist new initiatives.
It is past time for President Obama to fire Summers, Geithner, and the rest of his economic team and to bring in people who understand we are still in the midst of a global economic meltdown. We need the federal government to spend a lot more money and we need the Federal Reserve to print a lot more money or we will see a massive double dip in the global economy similar to the second big dip in late 1931 that eventually drove the unemployment rate to 25% in 1933. The collapse of Dubai is not happening in a vacuum. All of a sudden Greece has been downgraded and Spain has been put on notice by the rating agencies. The credit markets are tightening up again as reality sets in and the bear market bounce ends. We need reality to reach the Whitehouse so they recognize their shrewd TARP moves are taking away more than they are giving.
