Being somewhat preoccupied with a tour promoting my new book ( All The Devils Are Here: The Hidden History of the Financial Crisis, co-authored by Joe Nocera) and guessing that you, dear reader, are still a tad besotted from eating too much Thanksgiving turkey and apple pie (I certainly did), I lay before you this week a platter of lighter fare. What follows are nine intriguing thoughts, ideas, contradictions, and absurdities that I've lately collected but don't necessarily endorse. Your criticisms, follow-ups, and other reactions are, as ever, welcome in the comment space below. Happy grazing!
The housing crisis ain't over. My friend and fellow Williams graduate David Pesikoff this fall observed the following in a weekly newsletter for investors in his hedge fund:
So while we have sideshows like Greece and the Fed and our trade deficit and on and on, it's important to remember what got us into this mess we're in: housing. The price bubble we created in housing made the NASDAQ bubble of 2000 look like the work of amateurs. While home real estate value is back to where it was in 2003, mortgage debt is up 50% or $3.4 trillion. So while prices may have round-tripped into fair territory, it will take years to work off the increase in debt. And if we get deflation, all bets are off.
Have a nice day!
Are state and local bonds safe? On Nov. 8, the credit-rating agency Standard & Poor's released several reports on the health of municipalities and states. S&P's overall take was somewhat reassuring: "From a credit perspective, actions to restore fiscal balance will avert default." Then, on Nov. 18, state insurance regulators asked several rating agencies whether their ratings reflected up-to-date information about major factors like pension and health care costs. The agencies said that their ratings accurately reflected risk, and that they had strengthened their municipal-bond teams.
Should we believe them?
Matti Peltonen, a senior regulator in the New York State Insurance Department, told the Wall Street Journal that finding an alternative method "just isn't doable" and that "in all likelihood, we will be relying on the rating agencies going forward." In other words, the world is still every bit as dependent on the rating agencies as it was before the crisis. Analyst Meredith Whitney is bravely trying to start her own bond-ratings firm. But will Whitney meet with more success than others who previously tried and failed to challenge the incumbents with more rigorous research?
Is the mortgage boom really over? The persistence of the housing crisis (see above) would suggest it is. But in mid-October, the mortgage-finance bible Mortgage Daily reported that a mortgage lender in California was actually planning to increase its staff by some 80 percent and more than double its home-loan production. The growth, said Mortgage Daily, was being funded by an $8 million investment. The lender is Skyline Financial, and its CEO is a man named Bill Dallas, who founded First Franklin (which eventually contributed to Merrill Lynch's downfall) and then Ownit (which declared bankruptcy in late 2006, giving it the distinction of being one of the first lenders to fall victim to the spreading crisis). I like Bill Dallas because he is one of the few participants willing to look back at the mortgage meltdown with a fair amount of honesty. But if I had $8 million to invest, I don't think this is where I'd put it.
Stop worrying about the budget deficit. My friend John Hempton, who writes a brilliant financial blog, is bullish on the United States. I am not, but I find Hempton's analysis a breath of fresh air. In a recent e-mail, he wrote:
There is 5 percent of GDP on the table if you ever get health insurance right. Five percent of GDP covers many, many ills. Indeed, getting health right is enough spondulick [that's Aussie slang for money] to solve all the core U.S. problems. Australia spends 8 percent of GDP less than the U.S. and gets better health outcomes. That is true no matter how you cut it. The American system is imbecilic. In imbecilic I see opportunity.
So … let's just fix it!
Is Uncle Sam a party to fraud? My pal John Ferguson used to work at Bank United, which was taken over by the Federal Deposit Insurance Company in the largest bank failure of 2009. The bank found new private-equity owners and is now preparing for an IPO. Its bailout cost taxpayers about $5.7 billion, according to one lawsuit. As of Sept. 30, the bank reported $1.82 billion in late or unpaid loans, representing 44.6 percent of its total loans. Almost all of that was absorbed by the FDIC in a loss-sharing agreement.
What bothers me about this deal is that the FDIC has looked at most of these loans and they know that they were done fraudulently or, at the very least, not done in the best interest of the borrower. If that is the case then, how can the FDIC not only allow the bank to foreclose on these homeowners, but reward the bank when it forecloses by guaranteeing the losses with the loss sharing agreement?
Seems like a good question!
Do lower taxes really lead to increased economic growth?Again from David Pesikoff, who is using data from the St. Louis Fed in real dollars: "From the 1990 recession to the next one in 2000, we gained 18 million jobs, trough to trough. From 2000 to 2009, trough to trough, we gained 3 million jobs. From 1947 to 2000, growth in gross domestic product was 3.6% compounded. From 2000-2010, growth in GDP will be about 1.6% compounded." Pesikoff points out that had we kept up the 3.6 percent growth rate (which occurred during an era when, most of the time, the top marginal income-tax rate was 70 to 90 percent), we'd have grown our economy by about $3 trillion more than we did during the previous decade (when the top marginal income-tax rate was a mere 35 percent). True, there are a lot of variables that have affected growth, and lower taxes may not be the problem. But are they the solution?
Fannie Mae and Freddie Mac can't be killed. Bill Maloni, Fannie's former chief lobbyist, writes an acerbic blog about these much-maligned "government sponsored enterprises," which pioneered the securitization of home mortgages. (Thanks to the collapse of the mortgage market, the GSEs have also, since Sept. 2008, been government-owned.) In a Nov. 29 dispatch ("Cats and Dogs"), Maloni wrote:
Good for Rep. Spencer Bachus (R-Ala.), who reports to friends that the House GOP Caucus will name him Chairman of House Financial Services, despite all of the GOP unhappiness with him when he was ranking member. All of [their] Lilliputians seeking to chop Bachus off at the ankles have gone onto other things. (Keep walking Michele Bachman (R-Minn)!) I've suggested that Bachus will rule over a restive Financial Services Committee with his party dying to tear apart Fannie and Freddie, but not being able to do so until they have a viable alternative in place and "therein lies the rub!"
Indeed. Won't it be hugely amusing to watch the newly Republican House try to make good on its promises to get rid of the crippled beasts that also happen to be the only things supporting the housing market?
State and local governments are propping up the U.S. economy.Former Merrill Lynch economist Dave Rosenberg now serves as the chief economist at the Canadian wealth-management firm Gluskin Sheff, where he pens a daily digest (registration required). On Nov. 22 he wrote: "What I think is being underestimated by the growth bulls is that the fiscal disarray at the state and local government is a major headwind for the U.S. economy." At 13 percent of GDP, Rosenberg writes, spending by states, cities, and counties "is the second largest contributor to spending outside of the American consumer." But now state and local governments are at least trying to get their financial house in order. Should they succeed, that will be good news for bond holders (see above) but not necessarily good news in the short term for everyone else. Rosenberg notes that in mid-November when technology giant Cisco announced results that did not make investors happy, it blamed (in part) lower spending by state and local governments.
Have yourself a disappointing little Christmas. On Nov. 24, Rosenberg wrote:
The retailers are anticipating a solid holiday shopping season and yet they are aggressively marking down their prices well in advance. Interesting. We just got the Conference Board's annual survey and it showed that U.S. households [expect to spend] an average of just $384 on gifts this year, which is less than the $390 spent in 2009. Lynn Franco, the Conference Board's director, said "Consumers are approaching the holiday season in a somewhat cautious mood."
This year, Rosenberg notes, retailers added some 40,000 people to their staffs; last year they cut more than 100,000. What will that mean for profit margins when retail companies announce their results early next year?
An update from economist Dennis Gartman of The Gartman Letter:
It appeared from GPS satellite imagery of shopping centers around the country that there were far more cars in the nation's parking lots than there were a year ago, obviously leading us to believe that the shopping numbers would be up as sharply. However, the first hard data from sources such as ShopperTrak would suggest that the sums spent this year are barely above those of a year ago. ShopperTrak has spending up 0.3% from a year ago, with the group blaming heaving discounting by retail shops.
Online sales are obviously a factor; although early reports have online sales at 12 percent to 16 percent higher than last year, Gartman writes, it's too early to know how it will all shake out.
Pass me another eggnog.