Saturday, February 21, 2009

Four Bad Bears and a Crystal Ball

Doug Short has a plot of The Four Bad Bears on his website that has made the rounds among the finance blogs. But this version from my inbox includes the all-important crystal ball projection of the future of the current bad bear. (Click for bigger version.)

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Friday, February 20, 2009

Sugar-coating unemployment

Former president Jimmy Carter comparing the unemployment now to the Great Depression:
In announcing the renovation of the Carter Center, former President Jimmy Carter went off topic for a minute to answer a question comparing the current economic climate to the Great Depression of his childhood.

”There is no comparison to the Great Depression and where we are now,” he said. “The Great Depression was much more severe. Right now, we have 7 percent unemployment. In the Great Depression, it was four times that. Back then, there was no money.”

Why is this so hard? As we commented previously, there are six different measurements that the BLS puts out. Carter's 7% value neglects large swaths of the unemployed. Right now, the government's unemployment rate is 14% if you want the closest apples-to-apples comparison that can be made.

Public Service Announcement:

It's just shaping up to be one of those days. What are the NYSE circuit-breaker levels? As of first quarter:

In the event of a 850-POINT decline in the DJIA (10 percent):

Before 2 p.m.

2-2:30 p.m.

After 2:30 p.m.

In the event of a 1700-POINTdecline in the DJIA (20 percent):

Before 1 p.m.

1-2 p.m.

After 2 p.m.

In the event of a 2600-POINTdecline in the DJIA (30 percent), regardless of the time, MARKET CLOSES for the day.

Tuesday, February 17, 2009

GM wants another $16B

According to the WSJ, GM wants another $16.6B. Their plan to achieve stability requires cutting 47,000 people. And the carrot? If you don't give them the money, it'll cost $100B.

Let us hope that the arithmetic is not lost on the treasury: You can shutdown GM pay every single employee (all 252,000 of them) $30K per year for two years for $16.6B.

No doubt, $30K/year would cause pain to those without savings. But what exactly is the taxpayer getting by dumping this money into GM? Since the current management has run the company into the ground, shouldn't we consider letting nature take it's course and apply $16.6B to the mop-up operation after the bankruptcy?

Monday, February 16, 2009

Unemployment Apples and Oranges

Frankly, I don't care about republicans or democrats. But the last thing that the current economy needs is folks who are foolishly ignorant about government statistics with bully pulpits, because it is already a hard economic problem to solve. In a politically motivated op-ed that should never have made it past the editors:
Consider the job losses that Mr. Obama always cites. ... The latest survey pegs U.S. unemployment at 7.6%. That's more than three percentage points below the 1982 peak (10.8%) and not even a third of the peak in 1932 (25.2%). You simply can't equate 7.6% unemployment with the Great Depression.
Sadly, nobody has informed Bradley Schiller about the difference between how stats were collected in 1932 and how BLS publishes the numbers now.

Currently, there are in fact 6 different measures of unemployment, and they are labeled U1 to U6. The current 7.6% number quoted in the WSJ is U3, and it omits "discouraged workers" (among others) who would like to work but have not yet found work. In a protracted slump, U6 will increase as people become "discouraged" and are dropped from U3.

The current U6 is already 13.9%, and it is rising. Do you really want to let that number hit the 25.2% like in the first Great Depression?

Sunday, February 15, 2009

Cows and Nationalization

All cows are brown.
Here is something brown.
Therefore, it is a cow.

Let's apply the same logic to nationalization:

Socialist countries nationalize their banks.
Our banks are insolvent and so we nationalize them.
Therefore, we are a socialist country.


More and more, we find talking heads and blog writings equating "Nationalization" with "Socialism". Historically, this knee-jerk reaction originates by examining the history of countries that have gone socialist: One of the first actions is to nationalize major businesses.

In reference to the potential US nationalization of the banks, this argument is completely misplaced. When a company is run so badly that it files for bankruptcy, it is run by a judge until it emerges from bankruptcy (or is liquidated under the judge's supervision.)

Are there really people that want to argue that bankruptcy is a socialist trait, because a government representative runs the company for a while?

The banks are insolvent; they need to be dealt with. Unless somebody has a better way of dealing with these resets, the banks are going to be government-run entities for a while.

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Thursday, February 5, 2009

Mark to Market Suspension?

The market rumor this morning: Mark-to-market accounting will be suspended.

This rumor is consistent with the current bailout rumor of gov't purchase of assets. If the government were to buy assets below the banks carrying value, then the banks will have to take additional write-downs and would require more capital.

By suspension of M2M, then the gov't purchase can occur below carrying value, but the banks don't have to treat that purchase as a new valuation for their crap. Solvency is therefore maintained without new capital being injected. (ha ha).

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Wednesday, February 4, 2009

The New Welfare Queens

The NYT has an article on salary caps for banks taking taxpayer handouts. You should be amazed by the sense of entitlement:
“That is pretty draconian — $500,000 is not a lot of money, particularly if there is no bonus,” said James F. Reda, founder and managing director of James F. Reda & Associates, a compensation consulting firm. “And you know these companies that are in trouble are not going to pay much of an annual dividend.”
Well then, it sure is a shame that you ran your business into the ground and required a taxpayer bailout, isn't it? Frankly, $500K is still excessive considering the poor business leadership that has been demonstrated.

Damn welfare queens want to keep driving their cadillacs.

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Tuesday, February 3, 2009

Bonuses are Required? Bah.

The Wall Street Journal is having terrible cognitive dissonance this morning. On the one hand, we are told that:
It won't be easy to upend a compensation system that is woven into the fabric of the U.S. financial system. Many Wall Street employees work under employment contracts that can't be unwound.
On the other hand, bankrupt Lehman is getting swamped with resumes despite low pay:
"We're getting swamped with résumés," says Bryan Marsal, a turnaround expert who is now Lehman's chief executive officer. The inquiries, he says, are from people affiliated with marquee names such as Bank of America, Citigroup Inc., and Morgan Stanley.

"It's just a tough, tough time, and there are a lot of good people out there looking for work."

The wages are not great by past standards.
I'm sure that Erin Burnett, with her keen financial insight and deep understanding of corporate compensation, will have soothing words to help the WSJ editors get off the couch by noon.

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Monday, February 2, 2009

Who Pays?

By now it is painfully obvious that the nation's banks have driven their businesses into insolvency. Fundamentally, the banks bet their businesses on a perpetual rise in housing prices. Their bet was wrong, and now they are not merely illiquid, but insolvent.

It appears to me that the discussion over how to fix this problem omitted the first logical step: Who pays for the mistakes?

The realm of possible solutions really has only three possibilities:
1. The Treasury (and permit me to lump Congressionally-mandated solutions here.)
2. The Federal Reserve (Note that the Fed is not part of the government.)
3. The shareholders/bondholders of the banks.

Who are the actual people behind each of those broad groups?

If the banks' problems are solved by the treasury (and the stimulus package, if it passes): This money is nothing more than a loan guaranteed by future income taxes. Put simply, we are committing the money of the next generations for the errors of this generation.

If the banks' problems are solved by the Federal Reserve: The Fed would necessarily create money out of thin air. Who does this hurt? In short, anybody who was thrifty and who saved dollars in the past years. Those who lived beyond their means are rewarded by paying off debt with dollars that are now easier to come by.

The third group is those who ran the banks, and those who lent money to the banks in the form of bonds. At present, there seems to be little to no discussion about putting the burden squarely on the shoulders of these folks.

In summary, we can either make future generations pay, or we can make savers pay, or we can make those who made poor investments pay.

A future post will discuss more about the ramifications of holding shareholders/bondholders responsible.

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