This post first appeared on Minyanville.
Despite the trillions of dollars in unprecedented stimulus we've seen in the over the past 24 months, investors are still reducing their bets on rising commodity prices.
According to Bloomberg, hedge funds and other speculators reduced commodity exposure by 23% in the 2 weeks ending June 23. Though this can be attributed, in part, to profit-taking after the first quarterly increase since early 2008, traders aren’t convinced that excess inventories will be corrected any time soon.
The effect of any future economic growth on commodity prices is likely to be mixed. Even as higher demand from consumers and businesses for raw materials expands, so too will capacity, because miners, farmers, and drillers will ramp up production.
And the debate is heating up as to whether the longest recession since World War II is on its way out. While George Soros declared the worst of the financial crisis over, and the Federal Reserve said economic contraction is slowing, the World Bank lowered global economic growth forecasts, and economist Nouriel Roubini said higher fuel costs could deepen the ongoing slump.
On Wall Street, investors have been betting on a recovery, as oil-service firms Transocean (RIG) and Schlumberger (SLB) have risen 82% and 55% from recent lows, respectively. And, despite a recent pullback, miners like Freeport MacMoran (FCX) Newpont Mining (NEM), along with steel producers ArcelorMittal (MT) and US Steel (X), have had exceedingly strong years to date after some downright abysmal months.
Well-known hedge managers have jumped on the rising-prices bandwagon: Nassim Nicholas Taleb, author of The Black Swan: The Impact of the Highly Improbable, threw his weight behind the commodity trade earlier this month, announcing that his hedge fund, Universa Investments, planned on betting on massively higher prices.
But rising commodity prices -- indeed, all rising prices -- are a result of not only constricted supply, but of higher demand. As the US and the world as a whole prepare for a future devoid of cheap and easy credit, old expectations about economic growth must be tossed aside.
We're entering a transitional period, one in which economies in both developing and developed nations must readjust to the notion that debt isn't a sustainable vehicle for growth, and that true productivity and innovation must drive any increase in the standard of living. In the long run, this return to traditional capitalistic values will result in a rising tide that lifts all boats.
Showing posts with label STIMULUS. Show all posts
Showing posts with label STIMULUS. Show all posts
Tuesday, June 30, 2009
Tuesday, March 24, 2009
Keepin’ It Real Estate: Going Green on Uncle Sam’s Dime
This post first appeared on Minyanville and Cirios Real Estate.
It’s starting to make economic sense to go green.
Last summer, with gas prices topping $4 per gallon and commodities of all kinds becoming more expensive, renewable energy advocates thought their day in sun -- so to speak -- had finally arrived.
Investors flocked to industry leaders like First Solar (FSLR) and SunPower (SPWRA), whose stocks leapt to new highs. On July 8, 2008, renowned investor T. Boone Pickens announced an ambitious plan to wean America off its dependence on foreign oil. Later that week, crude touched an all-time high of $147.02 per barrel.
Since then, oil -- along the rest of the commodity complex -- has plunged, dashing hopes that renewable energy would soon be as cheap, if not cheaper, than traditional, dirty fossil fuels. But now, with the economy in free fall and Washington scrambling to boost productivity, renewable energy has been taken off life support.
Part of the recently passed $797 billion economic stimulus package gives incentives to homeowners to adopt energy-saving appliances, solar panels and other eco-friendly add-ons. Increased tax credits for qualifying expenditures can reduce tax bills by thousands of dollars a year. The catch (and there’s always a catch when the government is involved): Benefits only arrive if you shell out big bucks for pricey green gear.
Tax credits are applicable on new expenditures, and since solar-panel systems run in the tens of thousands of dollars, the 30% tax credit isn’t exactly like socking money away in the bank. Still, green construction firms and solar panel installation outfits like Akeena Solar (AKNS) are eager snatch up new business.
Before the credit crunch and the ensuing financial meltdown, Akeena had actually partnered with Comerica Bank (CMA) to offer low interest loans for buyers of new solar-energy systems, a portion of which could be backed by the value of the home. Since monthly loan payments were easier to stomach than plunking down cash to buy a new system, these new lending programs could have made solar available to the masses.
But now that home values have plummeted and lenders are reticent to part with their precious dollars, such borrowing programs are nearly impossible to find. Still, for those homeowners intrepid enough to take the plunge, tax credits offer an attractive reason to get off the green fence.
While solar power isn’t as economically efficient as traditional electricity sources, the more money that’s pumped into new technologies -- even if it’s through a combination of private and public investment -- the sooner we’re likely to reach the parity solar advocates have been promising for decades.
And the sooner that happens, the better.
It’s starting to make economic sense to go green.
Last summer, with gas prices topping $4 per gallon and commodities of all kinds becoming more expensive, renewable energy advocates thought their day in sun -- so to speak -- had finally arrived.
Investors flocked to industry leaders like First Solar (FSLR) and SunPower (SPWRA), whose stocks leapt to new highs. On July 8, 2008, renowned investor T. Boone Pickens announced an ambitious plan to wean America off its dependence on foreign oil. Later that week, crude touched an all-time high of $147.02 per barrel.
Since then, oil -- along the rest of the commodity complex -- has plunged, dashing hopes that renewable energy would soon be as cheap, if not cheaper, than traditional, dirty fossil fuels. But now, with the economy in free fall and Washington scrambling to boost productivity, renewable energy has been taken off life support.
Part of the recently passed $797 billion economic stimulus package gives incentives to homeowners to adopt energy-saving appliances, solar panels and other eco-friendly add-ons. Increased tax credits for qualifying expenditures can reduce tax bills by thousands of dollars a year. The catch (and there’s always a catch when the government is involved): Benefits only arrive if you shell out big bucks for pricey green gear.
Tax credits are applicable on new expenditures, and since solar-panel systems run in the tens of thousands of dollars, the 30% tax credit isn’t exactly like socking money away in the bank. Still, green construction firms and solar panel installation outfits like Akeena Solar (AKNS) are eager snatch up new business.
Before the credit crunch and the ensuing financial meltdown, Akeena had actually partnered with Comerica Bank (CMA) to offer low interest loans for buyers of new solar-energy systems, a portion of which could be backed by the value of the home. Since monthly loan payments were easier to stomach than plunking down cash to buy a new system, these new lending programs could have made solar available to the masses.
But now that home values have plummeted and lenders are reticent to part with their precious dollars, such borrowing programs are nearly impossible to find. Still, for those homeowners intrepid enough to take the plunge, tax credits offer an attractive reason to get off the green fence.
While solar power isn’t as economically efficient as traditional electricity sources, the more money that’s pumped into new technologies -- even if it’s through a combination of private and public investment -- the sooner we’re likely to reach the parity solar advocates have been promising for decades.
And the sooner that happens, the better.
Wednesday, March 18, 2009
Local Governments Bail Themselves Out
This post first appeared on Minyanville.
Reeling from rising unemployment and the shuttering of local businesses, municipalities are enacting mini-stimulus packages of their own. According to the Wall Street Journal, some are taking the traditional approach: Tax breaks and public works. Others are getting creative, rewarding shopping sprees with gift cards, giving no-interest loans to small businesses, and offering discounted office space for entrepreneurs.
New York City, where much of our current economic malaise originated, even earmarked $15 million of its $43 billion budget to help out-of-work investment bankers start their own companies.
Meanwhile, states like Ohio and Iowa are floating bond issuances to raise funds to put their citizens to work. Governors expect to generate tens of thousands of new jobs from bridge building, road improvements and other public-works projects that President Barack Obama’s $797 billion stimulus package aims to cover. But rather than wait for the funds, or deal with strings inevitably attached to federal money, states are acting now.
This trend isn’t likely to subside any time soon.
With the federal government running a massive deficit -- the Treasury Department spent almost $200 billion more than it took in this February -- states, counties and cities are reluctant to rely on aid from Washington. And with mind-boggling sums being siphoned off by the growing list of firms suckling at the government teat, AIG (AIG), Fannie Mae (FNM), Freddie Mac (FRE), Citigroup (C), and Bank of America (BAC) the worst offenders, it’s no surprise local governments aren’t confident they’ll get theirs any time soon.
Further, as taxes rise to cover massive spending on tap for the next few years, those who had little to do with the housing bubble, Wall Street's collapse, or the credit crisis may begin to wonder why they're being asked to pick up the tab.
It’s only a matter of time before local lawmakers begin to ask the serious question: Do we really want to go down with this ship?
Reeling from rising unemployment and the shuttering of local businesses, municipalities are enacting mini-stimulus packages of their own. According to the Wall Street Journal, some are taking the traditional approach: Tax breaks and public works. Others are getting creative, rewarding shopping sprees with gift cards, giving no-interest loans to small businesses, and offering discounted office space for entrepreneurs.
New York City, where much of our current economic malaise originated, even earmarked $15 million of its $43 billion budget to help out-of-work investment bankers start their own companies.
Meanwhile, states like Ohio and Iowa are floating bond issuances to raise funds to put their citizens to work. Governors expect to generate tens of thousands of new jobs from bridge building, road improvements and other public-works projects that President Barack Obama’s $797 billion stimulus package aims to cover. But rather than wait for the funds, or deal with strings inevitably attached to federal money, states are acting now.
This trend isn’t likely to subside any time soon.
With the federal government running a massive deficit -- the Treasury Department spent almost $200 billion more than it took in this February -- states, counties and cities are reluctant to rely on aid from Washington. And with mind-boggling sums being siphoned off by the growing list of firms suckling at the government teat, AIG (AIG), Fannie Mae (FNM), Freddie Mac (FRE), Citigroup (C), and Bank of America (BAC) the worst offenders, it’s no surprise local governments aren’t confident they’ll get theirs any time soon.
Further, as taxes rise to cover massive spending on tap for the next few years, those who had little to do with the housing bubble, Wall Street's collapse, or the credit crisis may begin to wonder why they're being asked to pick up the tab.
It’s only a matter of time before local lawmakers begin to ask the serious question: Do we really want to go down with this ship?
US to G20: Spend, Spend, Spend
This post first appeared on Minyanville.
The move sparked a sharp 20% rally in the S&P 500. The index has since tumbled more than 30% to lows not seen since the 1990s.
If markets are jittery once again, it’s not without justification: In just under a month, global leaders will once again put their heads together, this time to hash out the best way to solve the deepening economic malaise. Hopes are high lawmakers will dream up new (and better) ways to get the world's largest economies back on track.
On April 2, in London, the US is expected to encourage its counterparts at the Group of 20 Summit to increase government-spending efforts to revitalize flagging economies. According to the Wall Street Journal, President Obama and Treasury Secretary Tim Geithner are expected to butt heads with European officials, who would prefer to shift the focus onto crafting stricter financial regulations.
The European Union, many believe, is facing an even worse economic outlook than the US. But those across the pond could need fewer new spending initiatives, since they have further-reaching social programs already in place. In addition, the European Central Bank, or ECB, is far more hawkish (read: concerned) about inflation than is our Federal Reserve.
Digging ourselves out of this mess with more borrowing could spark renewed inflation.
The ECB took longer to lower interest rates last year despite deteriorating economic conditions, citing worries about rising prices. In contrast, Fed Chairman Ben Bernanke aggressively reduced borrowing costs in the hope that companies would borrow to jumpstart new growth. Frozen credit markets didn’t cooperate, plunging the financial system into widespread disarray.
Of the countries that make up the G20, only Saudi Arabia, Spain and Australia plan to spend more propping up their economy than the US, according to data compiled by the International Monetary Fund. Of course, that doesn’t include the hundreds of billions already wasted - um, injected into the likes of Goldman Sachs (GS), Morgan Stanley (MS), JPMorgan (JPM), Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC).
Also left out of these figures are the trillions of dollars the Fed has pumped into the financial system to keep credit flowing -- however reluctantly -- throughout the economy.
The upcoming meeting marks President Obama's first chance to woo world leaders on the global stage. And while his social programs may gain favor among certain European lawmakers, his country's role in creating this mess certainly won't.
The rest of the world increasingly feels its being forced to clean up a problem that was largely American-made.
The move sparked a sharp 20% rally in the S&P 500. The index has since tumbled more than 30% to lows not seen since the 1990s.
If markets are jittery once again, it’s not without justification: In just under a month, global leaders will once again put their heads together, this time to hash out the best way to solve the deepening economic malaise. Hopes are high lawmakers will dream up new (and better) ways to get the world's largest economies back on track.
On April 2, in London, the US is expected to encourage its counterparts at the Group of 20 Summit to increase government-spending efforts to revitalize flagging economies. According to the Wall Street Journal, President Obama and Treasury Secretary Tim Geithner are expected to butt heads with European officials, who would prefer to shift the focus onto crafting stricter financial regulations.
The European Union, many believe, is facing an even worse economic outlook than the US. But those across the pond could need fewer new spending initiatives, since they have further-reaching social programs already in place. In addition, the European Central Bank, or ECB, is far more hawkish (read: concerned) about inflation than is our Federal Reserve.
Digging ourselves out of this mess with more borrowing could spark renewed inflation.
The ECB took longer to lower interest rates last year despite deteriorating economic conditions, citing worries about rising prices. In contrast, Fed Chairman Ben Bernanke aggressively reduced borrowing costs in the hope that companies would borrow to jumpstart new growth. Frozen credit markets didn’t cooperate, plunging the financial system into widespread disarray.
Of the countries that make up the G20, only Saudi Arabia, Spain and Australia plan to spend more propping up their economy than the US, according to data compiled by the International Monetary Fund. Of course, that doesn’t include the hundreds of billions already wasted - um, injected into the likes of Goldman Sachs (GS), Morgan Stanley (MS), JPMorgan (JPM), Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC).
Also left out of these figures are the trillions of dollars the Fed has pumped into the financial system to keep credit flowing -- however reluctantly -- throughout the economy.
The upcoming meeting marks President Obama's first chance to woo world leaders on the global stage. And while his social programs may gain favor among certain European lawmakers, his country's role in creating this mess certainly won't.
The rest of the world increasingly feels its being forced to clean up a problem that was largely American-made.
Saturday, March 7, 2009
Desperately Seeking Dollars: Greenback Catches a Bid
This post first appeared on Minyanville.
And while the answer to this conundrum is indeed complicated, its roots lie in how economic participants react to economic crisis and, ultimately, to deflation.
According to Bloomberg, in banking panics past, lenders tended to focus on doing business at home, rather than abroad. This makes logical sense: Bankers want to begin by helping those in their own backyards. The ongoing spat between Western and Eastern Europe, with the latter begging the former for help, is evidence that saving one’s own skin tends to take precedent when times get tough.
As a result, countries heavily reliant on foreign lending tend to fare poorly when such currency “protectionism” takes hold. Despite profound troubles at Citigroup (C), AIG (AIG) and Bank of America (BAC) -- to name but a few US financial institutions swimming in shark-infested waters -- many believe our banks, and indeed our economy, will fare better than those around the world.
Furthermore, as an economy spins out of control, politicians respond by firing up nationalistic rhetoric, urging a country’s citizens to band together. The widely-discussed “Buy American” provision in President Obama’s economic stimulus plan is but one example of lawmakers asking the electorate to “turn inward” in the face of danger.
Returning to the dollar, in addition to investors betting on the American economy to outperform its international counterparties, ongoing deleveraging favors the American currency. Dollar-denominated debt must be repaid with dollars, and as debtors scrounge up greenbacks to pay back their creditors, dollars become more scarce, driving their value upwards.
Deflation, which goes hand-in-hand with deleveraging, encourages consumers to hold on to cash, since as prices fall their dollars stretch further tomorrow, than they did today. Housing is a perfect example -- why buy a home today that will be worth less tomorrow?
The dollar is now approaching a near-term high not seen since the last time equity markets plunged to new lows (last November). This echoes Toddo's persistent theme of "asset class inflation vs. dollar devaluation." It's no doubt policymakers and the Plunge Protection Team are acutely aware of this relationship -- it's now a question of when, and how, they'll act.
Stay tuned, as Mr. Practical is apt to say: Risk is high.
And while the answer to this conundrum is indeed complicated, its roots lie in how economic participants react to economic crisis and, ultimately, to deflation.
According to Bloomberg, in banking panics past, lenders tended to focus on doing business at home, rather than abroad. This makes logical sense: Bankers want to begin by helping those in their own backyards. The ongoing spat between Western and Eastern Europe, with the latter begging the former for help, is evidence that saving one’s own skin tends to take precedent when times get tough.
As a result, countries heavily reliant on foreign lending tend to fare poorly when such currency “protectionism” takes hold. Despite profound troubles at Citigroup (C), AIG (AIG) and Bank of America (BAC) -- to name but a few US financial institutions swimming in shark-infested waters -- many believe our banks, and indeed our economy, will fare better than those around the world.
Furthermore, as an economy spins out of control, politicians respond by firing up nationalistic rhetoric, urging a country’s citizens to band together. The widely-discussed “Buy American” provision in President Obama’s economic stimulus plan is but one example of lawmakers asking the electorate to “turn inward” in the face of danger.
Returning to the dollar, in addition to investors betting on the American economy to outperform its international counterparties, ongoing deleveraging favors the American currency. Dollar-denominated debt must be repaid with dollars, and as debtors scrounge up greenbacks to pay back their creditors, dollars become more scarce, driving their value upwards.
Deflation, which goes hand-in-hand with deleveraging, encourages consumers to hold on to cash, since as prices fall their dollars stretch further tomorrow, than they did today. Housing is a perfect example -- why buy a home today that will be worth less tomorrow?
The dollar is now approaching a near-term high not seen since the last time equity markets plunged to new lows (last November). This echoes Toddo's persistent theme of "asset class inflation vs. dollar devaluation." It's no doubt policymakers and the Plunge Protection Team are acutely aware of this relationship -- it's now a question of when, and how, they'll act.
Stay tuned, as Mr. Practical is apt to say: Risk is high.
Wednesday, February 11, 2009
Fighting Debt With... Debt?
This post first appeared on Minyanville and Cirios Real Estate.
The Senate, in passing its version of the over $800 billion economic stimulus package yesterday, threw a great deal of cash at 2 industries whose products we have far too much of already. Despite the fact that we have too many cars on the road and far more homes than we do people to buy them, lawmakers are determined to prop up both the auto-making and home-building industries.
According to Bloomberg, Ford (F), General Motors (GM) and Chrysler, the latter 2 already suckling the government teat just to stay alive, will benefit from a provision that allows consumers to deduct car-loan interest payments and local sales taxes from their income tax.
Meanwhile, Centex (CTX), DR Horton (DHI) and other homebuilders are salivating at the prospect of a $15,000 tax credit for those brave enough to buy a new home. The new, more generous tax break replaces a $7,500 credit granted last year.
In what shouldn’t come as a surprise, Brian Catalde, the president of the National Association of Homebuilders (or NAHB) is pleased that his group’s intense lobbying efforts paid off.
“We’re pretty happy with the way the Senate bill is shaping up," Catalde said. "We think it will entice a lot of those people sitting on the sidelines into the marketplace.
”NAHB members nervously await the disposition of the final bill as their balance sheets remain bloated with unsold homes priced well above prevailing market prices.
Lawmakers seem determined to dig our way out our debt problem with yet more debt. By encouraging Americans to borrow more to buy the cars and homes irresponsibly manufactured by these industries in the first place, Congress and the President alike reward the very poor financial decisions that brought our economy to its knees in the first place.
To borrow the analogy from Professor Succo's piece yesterday, Economy: Code Blue, this is akin to handing an obese person a donut, telling them to munch away as long as they stay away from pizza. It just doesn't make any sense.
Among the Senate bill's numerous differences from the House’s version passed last week -- most notably the handouts earmarked for homebuilders and automakers -- it also excises more than $20 billion in funding for new public-school construction.
Once again, lawmakers display their unparalleled financial acumen: Only more McMansions will counteract the vast oversupply of schools this country is struggling to get out from under.
The Senate, in passing its version of the over $800 billion economic stimulus package yesterday, threw a great deal of cash at 2 industries whose products we have far too much of already. Despite the fact that we have too many cars on the road and far more homes than we do people to buy them, lawmakers are determined to prop up both the auto-making and home-building industries.
According to Bloomberg, Ford (F), General Motors (GM) and Chrysler, the latter 2 already suckling the government teat just to stay alive, will benefit from a provision that allows consumers to deduct car-loan interest payments and local sales taxes from their income tax.
Meanwhile, Centex (CTX), DR Horton (DHI) and other homebuilders are salivating at the prospect of a $15,000 tax credit for those brave enough to buy a new home. The new, more generous tax break replaces a $7,500 credit granted last year.
In what shouldn’t come as a surprise, Brian Catalde, the president of the National Association of Homebuilders (or NAHB) is pleased that his group’s intense lobbying efforts paid off.
“We’re pretty happy with the way the Senate bill is shaping up," Catalde said. "We think it will entice a lot of those people sitting on the sidelines into the marketplace.
”NAHB members nervously await the disposition of the final bill as their balance sheets remain bloated with unsold homes priced well above prevailing market prices.
Lawmakers seem determined to dig our way out our debt problem with yet more debt. By encouraging Americans to borrow more to buy the cars and homes irresponsibly manufactured by these industries in the first place, Congress and the President alike reward the very poor financial decisions that brought our economy to its knees in the first place.
To borrow the analogy from Professor Succo's piece yesterday, Economy: Code Blue, this is akin to handing an obese person a donut, telling them to munch away as long as they stay away from pizza. It just doesn't make any sense.
Among the Senate bill's numerous differences from the House’s version passed last week -- most notably the handouts earmarked for homebuilders and automakers -- it also excises more than $20 billion in funding for new public-school construction.
Once again, lawmakers display their unparalleled financial acumen: Only more McMansions will counteract the vast oversupply of schools this country is struggling to get out from under.
Wednesday, January 21, 2009
Hope in DC, Panic on Wall Street
This post first appeared on Minyanville.
Amid much fanfare, President Barack Obama was sworn in yesterday as the forty-fourth president of the United States. A few short hours later, shares of the largest American banks tumbled, as if to remind the incoming Commander-in-Chief that, though America was jubilant, Wall Street remains in dissaray.
Shares of Wells Fargo (WFC), JPMorgan (JPM), Citigroup (C) and Bank of America (BAC), the backbone of what remains of the world’s financial system, reached lows not seen in decades. Investors fear what some have called “creeping nationalization,” as monetary and fiscal authorities appear content to let equity holders suffer the worst of the losses.
Obama is now expected to rush through a sweeping economic stimulus plan, which, by most accounts, could pump upwards of $800 billion into our floundering economy through a patchwork strategy of tax relief and government spending.
And while pundits, academics and bureaucrats bicker about the best way to spend our precious taxpayer dollars, an arid swath of suburban California desert could serve as a valuable test case for effective (and ineffective) public spending.
Just a few years ago, homebuilders like Lennar (LEN), DR Horton (DHI) and Centex (CTX) flocked to Riverside and San Bernadino County to capitalize on the nascent housing boom. McMansions were frantically shoehorned between strip malls and clogged freeways. The 2 counties, which together make up the Inland Empire, a vast tract of urban sprawl east of Los Angeles, are now home to more than 2 million people.
The housing bust, well into its fourth year, has crippled the local economy.
Bloomberg reports unemployment in the Inland Empire matches Detroit at 9.5% - the highest of any metropolitan area in the country. 17,400 construction jobs have been lost in the last 12 months, home prices have slid almost 40% and previously dependable employers are closing up shop.
Local governments, however, are pushing ahead with over $1 billion in spending projects, from much-needed widening of freeways to a new $300 million jail. As Bloomberg notes, the projects illustrate both the potential and the limitations of government-led economic stimulus.
While infrastructure projects have helped limit layoffs, job openings are still virtually nonexistent : In one city, as many as 100 people per day may compete for a single minimum wage job. Local economists fear unemployment could reach 12%.
Outside construction, job creation has essentially stagnated. While a few intrepid entrepreneurs have sought out the region's now dirt-cheap office space and homes, anemic consumer spending is damaging traditional retailers, restaurants and other consumer-centric employers.
The biggest project -- the jail, naturally -- will create 4,500 jobs. But building new jails is hardly the economic stimulus the country should be depending on for job creation.
Obama’s strategy has shifted in recent weeks, as his plans to revive the American economy are becoming increasingly focused on tax relief, rather than on massive infrastructure projects. Tax cuts and rebate, while widely viewed as a less immediate way to jumpstart an economy, would reach into all industries, not just those tied to infrastructure.
Obama would be wise to spend a few minutes contemplating the dilapidated developments and barren strip malls of the Inland Empire. Although the area certainly represented the worst of the real estate bubble’s excesses, its woes are emblematic of the broader crisis the country now faces.
Amid much fanfare, President Barack Obama was sworn in yesterday as the forty-fourth president of the United States. A few short hours later, shares of the largest American banks tumbled, as if to remind the incoming Commander-in-Chief that, though America was jubilant, Wall Street remains in dissaray.
Shares of Wells Fargo (WFC), JPMorgan (JPM), Citigroup (C) and Bank of America (BAC), the backbone of what remains of the world’s financial system, reached lows not seen in decades. Investors fear what some have called “creeping nationalization,” as monetary and fiscal authorities appear content to let equity holders suffer the worst of the losses.
Obama is now expected to rush through a sweeping economic stimulus plan, which, by most accounts, could pump upwards of $800 billion into our floundering economy through a patchwork strategy of tax relief and government spending.
And while pundits, academics and bureaucrats bicker about the best way to spend our precious taxpayer dollars, an arid swath of suburban California desert could serve as a valuable test case for effective (and ineffective) public spending.
Just a few years ago, homebuilders like Lennar (LEN), DR Horton (DHI) and Centex (CTX) flocked to Riverside and San Bernadino County to capitalize on the nascent housing boom. McMansions were frantically shoehorned between strip malls and clogged freeways. The 2 counties, which together make up the Inland Empire, a vast tract of urban sprawl east of Los Angeles, are now home to more than 2 million people.
The housing bust, well into its fourth year, has crippled the local economy.
Bloomberg reports unemployment in the Inland Empire matches Detroit at 9.5% - the highest of any metropolitan area in the country. 17,400 construction jobs have been lost in the last 12 months, home prices have slid almost 40% and previously dependable employers are closing up shop.
Local governments, however, are pushing ahead with over $1 billion in spending projects, from much-needed widening of freeways to a new $300 million jail. As Bloomberg notes, the projects illustrate both the potential and the limitations of government-led economic stimulus.
While infrastructure projects have helped limit layoffs, job openings are still virtually nonexistent : In one city, as many as 100 people per day may compete for a single minimum wage job. Local economists fear unemployment could reach 12%.
Outside construction, job creation has essentially stagnated. While a few intrepid entrepreneurs have sought out the region's now dirt-cheap office space and homes, anemic consumer spending is damaging traditional retailers, restaurants and other consumer-centric employers.
The biggest project -- the jail, naturally -- will create 4,500 jobs. But building new jails is hardly the economic stimulus the country should be depending on for job creation.
Obama’s strategy has shifted in recent weeks, as his plans to revive the American economy are becoming increasingly focused on tax relief, rather than on massive infrastructure projects. Tax cuts and rebate, while widely viewed as a less immediate way to jumpstart an economy, would reach into all industries, not just those tied to infrastructure.
Obama would be wise to spend a few minutes contemplating the dilapidated developments and barren strip malls of the Inland Empire. Although the area certainly represented the worst of the real estate bubble’s excesses, its woes are emblematic of the broader crisis the country now faces.
Monday, January 5, 2009
Obama's Massive Tax Cuts
This post first appeared on Minyanville.
As Inauguration day nears, details of President-Elect Barack Obama’s huge economic stimulus package are emerging. In today's meeting with Congressional Democrats, Obama begins to lay out his vision for reviving the nation’s catatonic economy.
According to the Wall Street Journal, around 40% of what could be an almost $800 billion plan may come in the form of tax cuts. Rather than mailing rebate checks, as the Bush administration did last summer -- which by most accounts did little to boost real economic activity -- Obama wants to reduce tax withholdings to get more cash into the hands of middle-class workers with every paycheck.
The plan also calls for the widening of so-called “tax look-backs,” which allow companies to apply today's losses to future tax bills. The new proposal would let firms book losses against past tax payments, freeing up money for the current tax period.
To encourage businesses to buy new machines, factories and make other capital investments, Obama is considering allowing newly purchased assets to be more quickly depreciated. Along with tax breaks for hiring new workers and delaying layoffs, the new administration wants to discourage downsizing and prevent firms from delaying expansion plans.
These and other tax-specific initiatives would come on top of previously announced plans for heavy infrastructure investment. When news of the impending stimulus package began to trickle out toward the end of 2008, peddlers of all things metallic enjoyed a strong bounce into year-end.
Freeport McMoRan (FCX), the world's second-largest copper producer, is up almost 100% from its December lows, Nucor (NUE), America's largest steelmaker has bounced more than 90% since November and US Steel (X) is approaching levels not seen since last October. Still, these and other commodity-centric firms are well off highs seen just last summer.
Ultimately, dollars earmarked for businesses and consumers alike are being sent out with a single mission: To be spent. With consumer and business spending making up almost 85% of gross domestic product, it’s no wonder politicians are urging Americans to part with their precious pennies for the greater good.
As the sage Mr. Practical reminded us this morning, however, the true path to economic recovery is through saving, not spending. With each dollar the Federal Reserve prints to finance this massive deficit-spending program, our paychecks -- though they may be increasing in size -- are worth less every month.
Economic stimulus is all well and good, but handing out a currency that’s constantly being debased is akin to tires spinning in the mud: With each rotation, they just bury themselves deeper, and the task of unburying gets longer, more difficult, and infinitely dirtier.
As Inauguration day nears, details of President-Elect Barack Obama’s huge economic stimulus package are emerging. In today's meeting with Congressional Democrats, Obama begins to lay out his vision for reviving the nation’s catatonic economy.
According to the Wall Street Journal, around 40% of what could be an almost $800 billion plan may come in the form of tax cuts. Rather than mailing rebate checks, as the Bush administration did last summer -- which by most accounts did little to boost real economic activity -- Obama wants to reduce tax withholdings to get more cash into the hands of middle-class workers with every paycheck.
The plan also calls for the widening of so-called “tax look-backs,” which allow companies to apply today's losses to future tax bills. The new proposal would let firms book losses against past tax payments, freeing up money for the current tax period.
To encourage businesses to buy new machines, factories and make other capital investments, Obama is considering allowing newly purchased assets to be more quickly depreciated. Along with tax breaks for hiring new workers and delaying layoffs, the new administration wants to discourage downsizing and prevent firms from delaying expansion plans.
These and other tax-specific initiatives would come on top of previously announced plans for heavy infrastructure investment. When news of the impending stimulus package began to trickle out toward the end of 2008, peddlers of all things metallic enjoyed a strong bounce into year-end.
Freeport McMoRan (FCX), the world's second-largest copper producer, is up almost 100% from its December lows, Nucor (NUE), America's largest steelmaker has bounced more than 90% since November and US Steel (X) is approaching levels not seen since last October. Still, these and other commodity-centric firms are well off highs seen just last summer.
Ultimately, dollars earmarked for businesses and consumers alike are being sent out with a single mission: To be spent. With consumer and business spending making up almost 85% of gross domestic product, it’s no wonder politicians are urging Americans to part with their precious pennies for the greater good.
As the sage Mr. Practical reminded us this morning, however, the true path to economic recovery is through saving, not spending. With each dollar the Federal Reserve prints to finance this massive deficit-spending program, our paychecks -- though they may be increasing in size -- are worth less every month.
Economic stimulus is all well and good, but handing out a currency that’s constantly being debased is akin to tires spinning in the mud: With each rotation, they just bury themselves deeper, and the task of unburying gets longer, more difficult, and infinitely dirtier.
Wednesday, December 3, 2008
Paulson Rolling Out Rest of TARP?
This post first appeared on Minyanville.
$350 billion sure didn't last very long.
Just 60 days ago, Congress allocated $700 billion in TARP money to rescue the financial system, half of which was available immediately. Now, according to the Wall Steet Journal, Treasury Secretary Hank Paulson may ready to ask for the second half.
If he does, he's likely to face stiff opposition on Capitol Hill. A recent Government Accountability Office report rebuked the Treasury for insufficient oversight and staffing to ensure the money it has already poured into banks like Goldman Sachs (GS), Bank of America (BAC), JP Morgan (JPM) and Morgan Stanley (MS) is achieving the intended goals.
Meanwhile, Congress is eyeing the remaining bailout funds for other uses. First, and most immediately, lawmakers are likely to spring for an aid package for floundering automakers General Motors (GM), Ford (F) and Chrysler. The Big 3 said yesterday it would take $34 billion to save them from collapse.
Lawmakers are also pushing for more help for homeowners. The debate over loan modifications and how best to prevent foreclosures has intensified in recent weeks, as banks, loan servicers, investors, academics and regulators squabble over the best solution.
FDIC Chairman Sheila Bair has advanced an aggressive plan for the government to share potential losses with banks and streamline the modification process. Critics, however, argue Bair's program -- currently being stress-tested at failed California thrift IndyMac -- is falling short of lofty expectations and that claims of it's successes are overblown.
Compounding the complexity of deploying the bailout money is the transition to a new presidential administration. The Journal reports the Obama team is in close communication with the Bush administration, but is shying away from taking the lead in negotiations.
It's all but certain the $700 billion Congress allocated to prop up the financial system will simply be round one of a widescale capital infusion into American banks. Eroding economic conditions, falling consumer confidence and the ongoing credit contraction will continue to result in heavy losses for financial institutions across the country.
A broad-based stimulus package due to be announced on inauguration day is likely to include more help for troubled banks.
Still, short of outright nationalization, Washington is powerless to force banks to start lending again. Economic recoveries are typically spurred by an expansion of credit, making it cheaper for firms of all types to borrow, spend and start growing again. This time, however, banks won't part with their precious dollars for fear loans won't be repaid and losses will continue to spiral.
As well they should: Defaults across loan categories are rising as the economic malaise spreads up the credit spectrum. American consumers, strapped for cash and credit alike, are cutting back, reining in the rampant spending the propped up the domestic economy.
The road to recovery will be long, and not without potholes and hairpin turns, but it is a road nonetheless. As Toddo often says, "In order to get through this, we have to go through this.
$350 billion sure didn't last very long.
Just 60 days ago, Congress allocated $700 billion in TARP money to rescue the financial system, half of which was available immediately. Now, according to the Wall Steet Journal, Treasury Secretary Hank Paulson may ready to ask for the second half.
If he does, he's likely to face stiff opposition on Capitol Hill. A recent Government Accountability Office report rebuked the Treasury for insufficient oversight and staffing to ensure the money it has already poured into banks like Goldman Sachs (GS), Bank of America (BAC), JP Morgan (JPM) and Morgan Stanley (MS) is achieving the intended goals.
Meanwhile, Congress is eyeing the remaining bailout funds for other uses. First, and most immediately, lawmakers are likely to spring for an aid package for floundering automakers General Motors (GM), Ford (F) and Chrysler. The Big 3 said yesterday it would take $34 billion to save them from collapse.
Lawmakers are also pushing for more help for homeowners. The debate over loan modifications and how best to prevent foreclosures has intensified in recent weeks, as banks, loan servicers, investors, academics and regulators squabble over the best solution.
FDIC Chairman Sheila Bair has advanced an aggressive plan for the government to share potential losses with banks and streamline the modification process. Critics, however, argue Bair's program -- currently being stress-tested at failed California thrift IndyMac -- is falling short of lofty expectations and that claims of it's successes are overblown.
Compounding the complexity of deploying the bailout money is the transition to a new presidential administration. The Journal reports the Obama team is in close communication with the Bush administration, but is shying away from taking the lead in negotiations.
It's all but certain the $700 billion Congress allocated to prop up the financial system will simply be round one of a widescale capital infusion into American banks. Eroding economic conditions, falling consumer confidence and the ongoing credit contraction will continue to result in heavy losses for financial institutions across the country.
A broad-based stimulus package due to be announced on inauguration day is likely to include more help for troubled banks.
Still, short of outright nationalization, Washington is powerless to force banks to start lending again. Economic recoveries are typically spurred by an expansion of credit, making it cheaper for firms of all types to borrow, spend and start growing again. This time, however, banks won't part with their precious dollars for fear loans won't be repaid and losses will continue to spiral.
As well they should: Defaults across loan categories are rising as the economic malaise spreads up the credit spectrum. American consumers, strapped for cash and credit alike, are cutting back, reining in the rampant spending the propped up the domestic economy.
The road to recovery will be long, and not without potholes and hairpin turns, but it is a road nonetheless. As Toddo often says, "In order to get through this, we have to go through this.
Friday, November 7, 2008
A Second Stimulus Package?
This post first appeared on Minyanville.
The votes have barely been tallied from Tuesday’s election, and politicians are already rushing to heave more money into American’s sinking economic ship.
California Democrat and Speaker of the House Nancy Pelosi is urging lawmakers to push through a second stimulus package in short order. Arguing economic conditions have deteriorated such that waiting until President-Elect Obama takes office in January would be unwise, Pelosi floated a $60 to $100 billion relief package to be passed by the end of the month.
According to the Wall Street Journal, the Speaker believes tax cuts implemented by adjusting tax-withholding tables, rather than more rebates or reductions in capital-gains taxes, would immediately inject cash into the economy.
The proposal comes in conjunction with the convening of Obama’s 17-member economic advisory board, which includes such notables as Berkshire Hathaway (BRK-A) CEO Warren Buffett, Google (GOOG) CEO Eric Schmidt, former Treasury Secretary Robert Rubin, former Federal Reserve Chairman Paul Volker and others.
Pelosi is also busying herself with the troubled automakers, meeting with representatives from Ford (F), General Motors (GM) and Chrysler, LLC over their request for federal money to stay afloat. With Ford and GM burning through over $2 billion in cash every month, Pelosi has her work cut out for her to “ensure the viability of [the] industry” while “looking out for taxpayers.”
President Bush’s 2-month stint as a lame duck couldn’t come at a more trying time for the economy, or for Americans as a whole. Stock markets have plunged, lending has all but dried up, and the financial crisis continues to come in waves.
We have now passed the point where arguing for rational, market-based solutions to our economic woes is given any credence by lawmakers. Instead, government is viewed as the only viable solution, and arguments now focus on how, not whether, politicians should step in to control the economy.
As the sage Mr. Practical wrote this week, on the nature of government intervention:
It does much more harm than good, because it operates from imperfect information and non-economic motivation. They try to “fix” one thing, and another breaks.
Eventually the government by nationalizing/socializing markets will plug all the leaks by throwing enough “money” at things. But logic tells us this has major consequences: It will significantly lower productivity and profits.
Politicians are rushing to save the system, jamming through opaque rescue plans the relief-recipients themselves don't even understand. Even if one assumes for a moment our elected officials do in fact mean well, their attempts to deftly put out economic fires mirrors that of a skilled arsonist, loping from home to home with a jug of gasoline, pockets bulging with matches.
The votes have barely been tallied from Tuesday’s election, and politicians are already rushing to heave more money into American’s sinking economic ship.
California Democrat and Speaker of the House Nancy Pelosi is urging lawmakers to push through a second stimulus package in short order. Arguing economic conditions have deteriorated such that waiting until President-Elect Obama takes office in January would be unwise, Pelosi floated a $60 to $100 billion relief package to be passed by the end of the month.
According to the Wall Street Journal, the Speaker believes tax cuts implemented by adjusting tax-withholding tables, rather than more rebates or reductions in capital-gains taxes, would immediately inject cash into the economy.
The proposal comes in conjunction with the convening of Obama’s 17-member economic advisory board, which includes such notables as Berkshire Hathaway (BRK-A) CEO Warren Buffett, Google (GOOG) CEO Eric Schmidt, former Treasury Secretary Robert Rubin, former Federal Reserve Chairman Paul Volker and others.
Pelosi is also busying herself with the troubled automakers, meeting with representatives from Ford (F), General Motors (GM) and Chrysler, LLC over their request for federal money to stay afloat. With Ford and GM burning through over $2 billion in cash every month, Pelosi has her work cut out for her to “ensure the viability of [the] industry” while “looking out for taxpayers.”
President Bush’s 2-month stint as a lame duck couldn’t come at a more trying time for the economy, or for Americans as a whole. Stock markets have plunged, lending has all but dried up, and the financial crisis continues to come in waves.
We have now passed the point where arguing for rational, market-based solutions to our economic woes is given any credence by lawmakers. Instead, government is viewed as the only viable solution, and arguments now focus on how, not whether, politicians should step in to control the economy.
As the sage Mr. Practical wrote this week, on the nature of government intervention:
It does much more harm than good, because it operates from imperfect information and non-economic motivation. They try to “fix” one thing, and another breaks.
Eventually the government by nationalizing/socializing markets will plug all the leaks by throwing enough “money” at things. But logic tells us this has major consequences: It will significantly lower productivity and profits.
Politicians are rushing to save the system, jamming through opaque rescue plans the relief-recipients themselves don't even understand. Even if one assumes for a moment our elected officials do in fact mean well, their attempts to deftly put out economic fires mirrors that of a skilled arsonist, loping from home to home with a jug of gasoline, pockets bulging with matches.
Monday, November 3, 2008
National Debt Gets More Expensive
This post first appeared on Minyanville.
The national debt is getting more expensive.
Over the past 15 months, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson have unleashed a litany of programs aimed at averting wide-scale collapse of the American -- and indeed the global -- financial system. They go by the acronyms we've all come to know and love: TARP, CPFF, TAF, PDCF, TSFL, etc.
For all their nuances and complexities, the aim of each is to pump more cash into the American economy. Many of these programs are financed with Treasury debt, which is sold on the open market to domestic and international investors alike.
Bloomberg reports that, despite aggressive interest-rate cuts, the cost of US debt is rising - and will likely continue to do so.
Recently, as markets swooned, investors flocked to Treasuries as a safe haven. Yields -- which move in inverse relation to prices -- became almost non-existent as protecting capital trumped earning returns. Now, as credit markets slowly heal and the appetite for risk cautiously returns, many doubt existing demand will be enough to sop up the massive supply of American debt set to be issued in coming months.
Bureaucrats and regulators have pledged billions in support for our struggling economy: The money has to come from somewhere.
Foreign investors -- particularly Japan and China -- are the largest holders of our government-backed debt, and, as their economies stumble, federal budgets will become strained. Lower tax receipts and mounting costs means these countries will demand a higher return on their investments abroad.
This dynamic, coupled with increasing supply, is likely to push up yields on US Treasury debt. That means American taxpayers, gazing down the double barrel of the $700 billion bailout package and a likely second round of stimulus checks, will see their debt costs rise.
Credit costs throughout the economy are similarly moving north. Credit card companies like American Express (AXP) and Capital One (COF) are slashing lines and hiking up interest rates. Mortgage rates stubbornly continue to move higher, and corporate borrowing is as expensive as it’s ever been. That’s all after more than 400 basis points in Federal Reserve easing in less than a year-and-a-half.
Meanwhile, taxpayers wait eagerly to see if this increasingly expensive debt will be put to good use. In the past week, both Bank of America (BAC) and JPMorgan (JPM) have announced plans to step efforts to modify troubled mortgages. This is encouraging - but with 1800 banks lined up at the government trough, that $700 billion isn’t likely to last long.
For a group that would implore their fellow Americans to get out of debt and live within their means, Congress and their regulatory counterparts certainly don’t set a very good example.
The national debt is getting more expensive.
Over the past 15 months, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson have unleashed a litany of programs aimed at averting wide-scale collapse of the American -- and indeed the global -- financial system. They go by the acronyms we've all come to know and love: TARP, CPFF, TAF, PDCF, TSFL, etc.
For all their nuances and complexities, the aim of each is to pump more cash into the American economy. Many of these programs are financed with Treasury debt, which is sold on the open market to domestic and international investors alike.
Bloomberg reports that, despite aggressive interest-rate cuts, the cost of US debt is rising - and will likely continue to do so.
Recently, as markets swooned, investors flocked to Treasuries as a safe haven. Yields -- which move in inverse relation to prices -- became almost non-existent as protecting capital trumped earning returns. Now, as credit markets slowly heal and the appetite for risk cautiously returns, many doubt existing demand will be enough to sop up the massive supply of American debt set to be issued in coming months.
Bureaucrats and regulators have pledged billions in support for our struggling economy: The money has to come from somewhere.
Foreign investors -- particularly Japan and China -- are the largest holders of our government-backed debt, and, as their economies stumble, federal budgets will become strained. Lower tax receipts and mounting costs means these countries will demand a higher return on their investments abroad.
This dynamic, coupled with increasing supply, is likely to push up yields on US Treasury debt. That means American taxpayers, gazing down the double barrel of the $700 billion bailout package and a likely second round of stimulus checks, will see their debt costs rise.
Credit costs throughout the economy are similarly moving north. Credit card companies like American Express (AXP) and Capital One (COF) are slashing lines and hiking up interest rates. Mortgage rates stubbornly continue to move higher, and corporate borrowing is as expensive as it’s ever been. That’s all after more than 400 basis points in Federal Reserve easing in less than a year-and-a-half.
Meanwhile, taxpayers wait eagerly to see if this increasingly expensive debt will be put to good use. In the past week, both Bank of America (BAC) and JPMorgan (JPM) have announced plans to step efforts to modify troubled mortgages. This is encouraging - but with 1800 banks lined up at the government trough, that $700 billion isn’t likely to last long.
For a group that would implore their fellow Americans to get out of debt and live within their means, Congress and their regulatory counterparts certainly don’t set a very good example.
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