Monthly Archives: August 2009

More On The FDIC Situation

On August 7th I posted some commentary titled “The FDIC Situation.”  Here is a story from The Wall Street Journal that does a good job of summarizing the situation there:

http://online.wsj.com/article/SB125137695691263385.html?mod=djemalertNEWS

One of the statistics of interest:

“The FDIC’s insurance fund, which guards $6.2 trillion in U.S. deposits, fell to $10.4 billion at the quarter’s end, the lowest since mid-1993.”

While there are many variables that will determine the ultimate figure the FDIC may need to cover its guarantee obligations, it seems as if this situation could well become very significant.  Many trends and conditions seem to be aiding the possibility of bank failures.

SPX at 1028.93 as this post is written

President Obama’s Remarks on Ben Bernanke

On Tuesday President Obama made remarks upon nominating Ben Bernanke for a second term as Fed Chairman.  The remarks can be found here:

http://www.whitehouse.gov/the_press_office/Remarks-By-The-President-and-Ben-Bernanke-at-the-Nomination-of-Ben-Bernanke-For-Chairman-Of-the-Federal-Reserve/

I would like to comment on some of the phrases President Obama used in these remarks.

President Obama says, “The man next to me, Ben Bernanke, has led the Fed through one of the worst financial crises that this nation and the world has ever faced.”

and later:

“Ben approached a financial system on the verge of collapse with calm and wisdom; with bold action and out-of-the-box thinking that has helped put the brakes on our economic freefall.”

and later:

“But taken together, this “bold, persistent experimentation” has brought our economy back from the brink.”

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In the second phrase, I found the use of the word “approached” to be odd.

However, the greater significance in the above phrases is the reference to “bold action and out-of-the-box thinking” and “‘bold, persistent experimentation.'”  I was surprised to see the word “experimentation” mentioned; one would usually not think of an economy being “experimented” upon.  However, the description is probably accurate given what has transpired.  Perhaps the bigger question is whether the “experiment” has ended? Has it been a success?

With regard to this “out-of-the-box thinking” and “‘bold, persistent experimentation'” I would like to refer to a speech Janet Yellen (President and CEO, Federal Reserve Bank of San Francisco) gave on January 4, 2009.  In it she said that with regard to the Federal Reserve actions: ““Furthermore, many of the interventions are novel, so no straightforward methods are available to quantify their effectiveness. There are also no clear guidelines for the Fed to gauge the appropriate size of its interventions and few precedents for the Fed to use in communicating its policy stance to the public beyond announcing new programs and describing their terms in detail.”

SPX at 1030.98 as this post is written 

The Latest 10-Year Budget Projection

Yesterday, The Wall Street Journal came out with a story titled “A Decade of Debt” that can be found at this link:

http://online.wsj.com/article/SB125119686015756517.html

It discusses the latest 10-year budget projections that amount to a cumulative addition of $9 Trillion in debt.

I would like to briefly comment on this latest budget projection:

  • As seen in the article, there are no projected budget surpluses throughout the entire 10-year period.
  • Historically (at least the last couple of decades) these projections always seem to be too optimistic – meaning that the deficits realized are usually higher than planned.  I wouldn’t doubt this to be the case for this budget as well.  The economic projections of the last budget were criticized as being too optimistic, and as seen in the chart indicated in this article, economic projections to 2012 assume a very favorable economic climate including robust GDP growth and low inflation.  

As well, an additional issue is presented, one that I have commented on as recently as my post of August 21.  There seems to be a “growing insensitivity to higher deficits and debts.”   No one seemed especially surprised or aghast upon release of these numbers.  It appears that as time goes on, ever-larger deficits and debts seem to “legitimize” even larger deficits and debts, to the point where even a Trillion dollars, once inconceivable as an annual budget deficit, now almost seems “normal.”

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For those who may not be aware, I recently wrote an article titled “America’s Trojan Horse – A Different Look at The National Debt” which can be found listed under the Pages section on the right-hand side of the home page.

 

SPX at 1018.35 as this post is written

Thoughts on Ben Bernanke’s Tenure

With the announcement that Ben Bernanke will be nominated for a second term as Federal Reserve Chairman, I would like to make a few comments.

First, a brief review of some of the comments others have made with regard to Ben Bernanke’s tenure.   Here is a quote from Paul Krugman, as seen in the following August 10 Bloomberg story:

“I think Bernanke has done a really good job,” Krugman said. “He failed to see this coming and he was behind the curve in early phases. But he’s been really very good in the sense that it’s really very hard to see how anyone could have done more to stem this crisis.”

Krugman’s opinion seems to be largely in line with sentiments recently voiced by many other economists.

As well, other popular thoughts on Bernanke seem to be summarized well in this article:

http://online.wsj.com/article/SB125120274221856591.html

My thoughts on Bernanke haven’t changed.  I have periodically remarked on him; those remarks can be found in the “Ben Bernanke” category listed along the right side of the page.  Perhaps my June 10 post is the best summary of my thoughts:

https://www.economicgreenfield.com/2009/06/10/in-ben-we-trust/

As well, I will say that I feel that there have been many significant aspects of Ben Bernanke’s actions that have gone unnoticed, and/or have not been commented upon by anyone.

I will continue to comment on Ben Bernanke on an intermittent basis.

SPX at 1027.76 as this post is written

The CRE Problem

I would like to highlight an article from last Thursday titled, “Second Wave of the Credit Crisis: Collapsing Commercial Real Estate”  It can be found at this link:

http://www.ibdeditorials.com/IBDArticles.aspx?id=335660380569943

The article gives a good summary of the Commercial Real Estate (CRE) situation as well as makes other interesting observations.

CRE is yet another huge, menacing problem area inherent in our current economic situation.

SPX at 1025.57 as this post is written

Expanding Upon Two Concepts

I would like to briefly expand on a couple of points I made in my recently posted “America’s Trojan Horse” article (which can be found listed along the right-hand side of the main page.)

First, I wrote, “There also appears to be a growing insensitivity to higher deficits and debts.”  This is alarming, as sums  of money that recently (as of 1-2 years ago) would have been considered exceedingly high are now seen as relatively low.  An example of this was the $150 Billion tax rebate  (stimulus) that was distributed in the late spring and summer of 2008.  At the time, an $150 Billion stimulus was considered very substantial.  However, with the stimulus and interventions that have been enacted since, this $150 Billion amount almost seems relatively small by comparison. 

I fear that we, as a nation, may be losing our perspective and comprehension of the sums involved here.  While spending, or committing, $1 Trillion and multiples thereof (or $1 Billion for that matter) has become rather commonplace during this period of economic weakness, one should be mindful of  the difficulty in earning (as in profit) these amounts of money.

The second concept I would like to expand upon is that of “Intellectual Leadership.”  I devote a paragraph in the paper to this concept.  The phrase is not one which is often heard, which is unfortunate.   Nonetheless, I think it is a very important concept, especially during this period.

SPX at 1007.37 as this post is written

The Importance Of Dealing With Problems Early

During his July 22 Press Conference, President Obama said healthcare is “a problem that Washington has failed to solve for decades.”

Unfortunately, the healthcare problem isn’t the only problem that has been “brewing” for a long time. 

It is imperative that problematical issues are dealt with effectively when they are in their early stages.  Otherwise, if we wait for years, the issues often become incredibly complicated and costly to fix, as is the case with healthcare.

SPX at 1001.85 as this post is written

Healthcare – A Few Thoughts

As President Obama said during his July 22 Press Conference, healthcare is “a problem that Washington has failed to solve for decades.”

I want to make a few random comments about healthcare.  Any substantive discussion on my part would be exceedingly lengthy as this is a complex subject.

I do believe that there has to be major changes made, and quickly.  There are many large problems with the healthcare system in a variety of areas.

However, I think that in order to make effective changes, there has to be a greater understanding of the problems inherent in the current system.  As well, there should be an examination of some of the current assumptions being made.

Some questions I would ask are:

Should government be involved in healthcare?  Why?

What are the underlying problems of the healthcare system?

Do we fully understand the problems of the healthcare system?

What would be the attributes of a perfect healthcare system?

Are there models analogous to the healthcare scenario that a person faces?  What can we learn from them?

Also, I wanted to exhibit this recent op-ed from The Wall Street Journal.  John Cochrane makes some interesting points that are worthy of contemplation:

http://online.wsj.com/article/SB10001424052970203609204574316172512242220.html

 

SPX at 982.51 as this post is written

What Is The Stock Market “Telling” Us?

With the stock market (as seen in the S&P500) recently near the 1020 level, there is no debating that the rally since the early March lows of 666 has been a very strong one.  Also, there have been very strong rallies in other markets as well (Nasdaq, Emerging Markets, Debt Markets, etc.)

Below is the 1-Year Daily Price Chart of the S&P500:

Chart Courtesy of StockCharts.com

Chart Courtesy of StockCharts.com

 

Given this strong rally, one is led to wonder as to what the stock market is “telling” us.  Such a strong rally in the face of pervasive economic weakness seems contradictory.

The stock market seems to be indicating that we will have a strong and quick economic recovery (likely a “V” recovery).  This can be inferred in a variety of ways.   One way would be to assess the S&P500’s current price level of 1000, in which we can see that it is pricing in a market PE of 20 to a 2009 operating earnings estimate of $50.   As well, this would equate to about 13x a 2010 operating earnings estimate of $75.  Of course, one can argue whether the “As Reported” figures should be used, which would generate an even greater earnings multiple. 

As I have indicated previously, I believe this market rally off the March lows of 666 is a Bear Market Rally – meaning by definition that a low below 666 will be forthcoming.  I’ll be further addressing this issue shortly.

The stock (and other markets) rally since mid-March appears to me to be very “speculative” in a variety of ways.  One need not look too far to see many disconcerting aspects in this rally.    

Since the stock market seems to be “pricing in” a very significant, and lasting, economic recovery, there will likely be significant repercussions should one not materialize.   These repercussions would likely entail a significant decline.  

Perhaps the main question should be whether a strong economic recovery is fundamentally assured to the extent the stock market seems to be indicating. 

SPX at 982.3 as this post is written