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Latest Comments15 Comments
Tuesday Outlook: Commodities, Emerging Markets
I like the way you have been doing. It is instant analysis (with years of experience and insight behind it) of what each chart presents. I am not interested in having educational blurbs in here except for some cryptic mentions of the backgrounds once in a while when necessary. Keep up the good work.
I got the sense that investors large and small are quite angry about all these bailouts and how all these politicians, both outgoing and incoming, are handling the current financial crisis, though not at the boiling point yet.
Seeking the Fix That Will Finally Work
Seeking the Fix That Will Finally Work
Friday Outlook: Commodities, Emerging Markets
Bailout Bill Passes; What Happens Now?
Here is why what you are saying is very close to what is happening.
On average, we American are in debt (mortgage and credit cards combined) for $150,000 or so per family. The median income of American family is $50,000 before tax per year and out of that each pays about $15,000 of interest to various lenders.
Any bank, even you, would be out of their or your mind to lend any more money to this bunch of people. I believe this is the root cause of today’s problem. We American are simply not credit worthy. It is not that banks do not want to lend. It is that more than half of us or not fit for borrowing.
Until this situation is corrected, the Fed can print as much money as they want but no prudent banks or persons, including you and me, would be willing to lend a penny. There will be job losses and economy downturn. We need some good and cool heads to get us out of this mess.
By the way, those investment bankers are in a bigger hole than you and I are. This $700 billion is to rescue them, not us. At least Paulson was honest at the beginning. All he said was to buy up bad credits from themselves, I mean the investment bankers. But, after the defeat of the bill in the Congress, the Democrat controlled Congress had twisted the whole thing and said this was a rescue of us average American. That scared everyone including us the voting average American and their mindless representatives. Now, just wait, we will all soon see very clearly that our tax money (whatever the government spent will eventually come out of our taxes) will be used to rescue these investment bankers with scarcely a drop trickled down to the average American.
Thursday Outlook: Commodities, Emerging Markets
The U.S. population is about 300 million with about 100 million families. Therefore, on average, each family is in debt for about $175,000. Suppose the average mortgage annual interest charge is 7% and that part of interest comes to about $10,000 a year per household. The interest on credit card can be as much as 20% a year and that part of interest comes to about $5,000 a year per household. The median annual household income is about $50,000 BEFORE TAX out of which each household is paying about $15,000 just for the interest charge. This is simply a untenable situation. More than half of us are under crushing pressure of this debt and many have already or will go bankrupt sooner or later.
As we get behind in our payments, the underlying securities become worthless and the banks owning them go belly up. As we cannot borrow and spent any more, businesses also go down. This is where we are today.
We are going to see a slower household spending and business growth if not some regression of both of them in the immediate future. This is unavoidable. We American have been living beyond our means and we have to put our financial house both private and public in order. This is going to take a long time. Perhaps there will be a recession first and the inflation afterwards. We are already in a recession. We do not know how deep it will go. Inflation is inevitable because without it we cannot wipe out all this debt crushing on our shoulder. We will be out in the clear when we look at half-a-million dollar houses as very cheap just like we now look at fifty-thousand dollar houses of thirty or forth years ago as so cheap that we can pay off the mortgages very easily. I bet many of us have done so and hadn’t succumbed to the lure of second mortgages and those are the financially prudent ones and who can weather the current financial storms.
So, what is this bail out about? Is it going to help any? As I just heard over the radio, someone said what the congress is facing now is between a bad bill and no bill at all. It is a clear choice: No Bill.
The consequence may be an immediate disaster in the financial market. However, after that, I hope the people who are in the position of directly affecting the politics and policies will hunker down to face the reality and do some things toward addressing the real problems of today. That would be a right step.
We are in a long haul regardless of whether the bill will pass or not.
A Bad Day, Yes, But Enough with the Hyperbole
We know that our financial situation has been worsening for years but no serious fixes have been made. And it has gotten worse in the last few weeks. The trouble started when both Fed and Treasury tried to make a “bold” move without any clear direction and created a crisis situation. When the move did not get where, the market “crashed.” What we needed were cool heads to negotiate through this financial storm with some done-to-earth measures such as Federal intervention of the bad mortgages to make both the lenders and borrowers “half whole.” Such moves would have benefited both Wall Street and Main Street. Instead, the “bold” move had the appearance (and, may be the substance) of Main Street “bailing out” the Wall Street, making lenders “whole” and borrowers “empty,” and the whole thing ended up bankrupting both of them, leading to the liquidity problems. The move was hailed as also a bail out of Main Street only after it was failed. It was a mess.
The situation was brought to a crisis proportion by the wrong move of Fed and Treasury. Apparently the “bold” move, my guess, by the Treasury was a flop. The Congress did not help. The media were no help either. What we need now is some cool heads and cool hands to guide us through this storm. Hopefully, both the Fed and Treasury have realized that they have been “hot” headed. They should now come up with some concrete steps in the days to come. It is important that they come up with something really workable, even if it starts with a little step in the right direction. DJI may drop another 3,000 points in the mean time. However, as long as the nation as a whole is moving in the right direction, the market will recover and the nation will also recover.
The Deal's Getting Done, But Will It Work?
This all assumes that our elected representatives and government officials behaves rationally (collectively) to rein in the excess in the Wall Street as well as to limit the money supply growth (to moderate future inflation). If they all behave properly, what happened in the last few years would be just a little blip in the long history of the market. If they don’t, we may turn ourselves into a banana republic in a big way.
If the DJI dips below 10,000 and stays there for sometimes, there will be hardship.
The bail out as currently structured is simply irresponsible. We do not need a bail out to save, however briefly, the failing companies whose management teams should mostly be blamed for their failure. Investors who had ignored the historic lesson should also blame themselves and should not look to the tax payers to bail them out. We need a “bail out” that channels all the reserve we have to create new jobs (highway, energy, and so on) to avert the hardship. We need a “bail out” that institutes sound regulations in the financial market to let the market behave orderly and responsibly. We need a “bail out” that places safeguards for the vast majority of investing public not to be taken by people offering too-good-to-be true investment schemes.
Let the mismanaged companies fail. Let us think how we pilot through this troubled financial time with whatever it takes but prudently. It may take more than $700 billion. $700 billion is just a talking number. We don’t have that kind of money. Unfortunately, many of us, including those in the negotiation, think that is the money we have in pocket and will be spent one way or the other.
The Calm Before the Storm?
Wednesday Outlook: Commodities, Emerging Markets
The financial institutions have knowingly (or, at least, they closed their eyes while they are doing so) lent money to people who could not afford the mortgage (who may have knowingly taken advantage of the situation or may have been lured into) to buy houses. Now, these people are bankrupt because they cannot pay their mortgages. And, these institutions are also bankrupt because of the non-performing debt. Now, here comes this bailout plan that takes the taxes paid by people, including those who owe money to these institutions, and give them to these institutions. With the new personal bankruptcy laws, these people would still have to pay up their mortgages to enrich these institutions or the bureaucracies (they never refund the tax money to the people; they only take a little less).
This simply doesn’t make sense.
There are two liquidity crises: One is the financial instruments that had bundled these mortgages in them had become much less valuable than their intrinsic worth and that causes these institutions to cease operation. Another is the people who are or about to be bankrupt whose rank are increasing because of the liquidity crisis of the former. They feed onto each other and thus our current financial death spiral.
The current bailout plan may temporarily halt the former but not the latter. Eventually, the latter will come around the make the situation even worse.
The reality is that the economy of the country as a whole would not be stabilized until the financial situation of most of these people have recovered to a level somewhat equivalent to that before they are falsely lured into buying something they could not afford. This takes a long time.
The other reality is that $700 billion is a lot of capital to get the economy going and why should we waste them on some worthless financial papers. The sensible thing to do may be is to do nothing and let all those institutions holding these worthless financial papers to fend for themselves, even bankruptcies. Let the bankruptcy courts and the new owners of these “toxic” instruments to work out what to do with them. In the meantime, inject this $700 billion into the economy to get it going again. Just think $700 billion can pay one year’s salary to 14 million people at $50,000 each. “Helicopter” Ben should be spraying this money on the healthy companies not to the deadbeats.
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You may also notice that DJI stayed just about 1,000 for about 16 years between 1966 and 1982. You will also see a big run up of DJI in the 20 some years before 1966. Now, look at the big run up of DJI between 1982 and 1999. It is up to you to guess what is going to happen in the next decade or so. DJI hovering around 10,000? You may or may not believe in the law of average. But, no one can tell.
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