Friday, August 28, 2009

Idiocranomics: We Need More Debt For A Solid Economy....What?

I tried really, really hard not to post this link and comment on it, but I just can't let it go. I'll let you read Krugman's latest on why deficits are suddenly good, but here is the basic conclusion:

So don’t fret about this year’s deficit; we actually need to run up federal debt right now and need to keep doing it until the economy is on a solid path to recovery. And the extra debt should be manageable. If we face a potential problem, it’s not because the economy can’t handle the extra debt. Instead, it’s the politics, stupid.

Yes, I know Mr. Krugman won a Nobel Prize in Economics, but are you kidding me?

We need more debt to solve the problem of excessive debt? We need to spend even more money.....NOW? Is it me or do you feel like sometimes you're living in the twilight zone.

O.K., one last quote:

So new budget projections show a cumulative deficit of $9 trillion over the next decade. According to many commentators, that’s a terrifying number, requiring drastic action — in particular, of course, canceling efforts to boost the economy and calling off health care reform.

The truth is more complicated and less frightening. Right now deficits are actually helping the economy. In fact, deficits here and in other major economies saved the world from a much deeper slump. The longer-term outlook is worrying, but it’s not catastrophic.

Less you think I'm taking him out of context, click the link above and read the column for yourself. You can't make this stuff up.

Not only is $9 trillion not "frightening" it is what will "save the world" and "it's not catastrophic".

I had dinner the other night with a group of people with political backgrounds that ranged from very conservative to very liberal and to a person they were not only sickened by our national debt, but quite literally frightened. I guess we've finally found an issue to bring our country bad its the one thing that could threaten or hasten its demise.

So to recap - more debt and deficit spending is Good, fixing our nation's structural problems and stopping the insanity...bad. If that's not idiocranomics, I don't know is.

BTW, I'm under no illusion that this problem wasn't a bi-partisan problem, both parties have contributed to these massive problems - and neither has any credability to (or will) to fix them.

Scott Dauenhauer CFP, MSFP, AIF

Federal Reserve Says Disclosing Loans Will Hurt Banks

Our financial leaders are up to it again, attempting to hold the American public hostage if we don't let them have their way. The Federal Reserve has been ordered to release information relating to financial institutions that benefited from emergency actions by the Fed, the Fed has steadfastly refused, calmly stating:

“The immediate release of these documents will destroy the board’s claims of exemption and right of appellate review,” the motion said. “The institutions whose names and information would be disclosed will also suffer irreparable harm.”

The Fed’s “ability to effectively manage the current, and any future, financial crisis” would be impaired, according to the motion. It said “significant harms” could befall the U.S. economy as well.

Hmmm, so our own money is used to bail out institutions and we aren't allowed to know anything about it because our financial system would suddenly be plunged into the abyss, at least part of this sounds familiar.

Remember last fall when then Treasury Secretary held a gun to our head and told us if we didn't pass TARP and spend a $1 trillion dollars the financial world would fall apart.......and then we passed it and the financial world fell apart? This is a variation on that play, essentially if we force the Fed to be transparent the financial system will collapse.

Is it me or has the Federal Reserve not exactly served its purpose? Is the Federal Reserve the new CIA? Ben Bernanke the ultimate financial spook? Just who is Bernanke trying to protect? This is all starting to have the feel of a Grisham/Brown type book, except its real.

Its time the Fed comes clean on a lot of things (including backdoor monetization...more on that later).

Scott Dauenhauer CFP, MSFP, AIF

Wednesday, August 26, 2009

Humor Break: It's a "Beer" Market, How To Hedge Your Beer

If you had purchased $1,000 of Delta Air Lines stock one year ago, you would have $49 left. With Fannie Mae, you would have $2.50 left of the original $1,000. With AIG, you would have less than $15 left. But, if you had purchased $1,000 worth of beer one year ago, drunk all of the beer, then turned in the cans for the aluminum recycling REFUND, you would have $214 cash. Based on the above, the best current investment advice is to drink heavily and recycle.

Some variant of the above story has been passed around the internet and e-mail since around 2002, the names changing as new big name companies plummet. I'm a bit skeptical about the $214 figure since the most I've found that you can get for a recycled can of beer is about five cents. Assuming you were able to buy some real cheap beer and purchased 2,000 cans.....that is about $100 in trade-in value.....still better than the stocks mentioned. I AM NOT ADVISING YOU TO BUY BEER RATHER THAN STOCKS.....of course given a story in today's Wall Street Journal, maybe Beer Stocks, here's an excerpt:

"We do plan on taking prices up in the fall on the majority of our volume in the majority of the U.S.," said David Peacock, president of Anheuser's U.S. division. "The environment is very favorable, we think."

So demand for beer is up and that means the beer companies can charge more for it (supply/demand), the question remains whether this is a beerish (pardon the pun) or bullish sign. Is beer drinking up because of an economic recovery or because more people are drinking due to financial troubles?

Actually neither, beer volume is flat or falling. The issue is that there is less competition in the market place do to the biggies buying up the competition.

Overall U.S. beer volumes are declining at the sharpest rate in more than a decade. In the first half of this year, sales from distributors to retailers fell 0.9%, and shipments from brewers to distributors fell 1.3%, according to the Beer Institute, an industry group. Anheuser recently began offering $2 rebates in several states on its economy brands.

Still, beer prices in the U.S. have risen faster than other consumer goods. In July, the price of beer, ale and other malt beverages sold for consumption at home rose 4.6% from a year earlier. Meanwhile, consumer prices in the U.S. overall were down 2.1%, the biggest 12-month decline since 1950, according to Labor Department data.

The two brewers are able to boost prices in part because each offers a wide variety of products at different price levels, said Carlos Laboy, an analyst with Credit Suisse. "They have the dominant position in every category of the industry from imports to premiums to discount brands," he said.

Whatever the reason for rising prices, beer prices are rising and at precisely the wrong time. At times during the last year the only thing keeping me sane was a nice frosted glass filled with a good Hefeweizen (Widmer, Pyramid, Franziskaner, Karl Strauss, Gordon Biersch).....of course I always waited till after hours!

So, what we have is not a "bear" or a "bull" market, but a true "beer" market! Prices for your favorite beer are rising so go buy some before they do and while you're at it pick up a few shares of beer stock to hedge against the future price increases!

Your Fellow Beer Snob,

Scott Dauenhauer CFP, MSFP, AIF

Friday, August 21, 2009

US Debt Clock

You have to click on the link to the debt clock, it is quite an amazing piece of work, a few facts:

Debt Per Citizen: $38,204
Spending Per Citizen (this year): $8,227
Official Unemployed: 14,655,361
Actual Unemployed: 16,641,836

And the number you've all been waiting for.....

US Unfunded Liabilities Per Citizen (Social Security, Medicare, Medicaid, Prescription Drug):


Do these numbers look sustainable to you? What is amazing is that the Prescription Drug unfunded liability is nearly as much as the unfunded liability for Social Security......unbelievable.

Scott Dauenhauer CFP, MSFP, AIF

Bernanke: Recovery Starting...But Should We Believe Him?

Ben Bernanke said the following today:

"the prospects for a return to growth in the near term appear good,"

"Looking forward, we must urgently address structural weaknesses in the financial system, in particular in the regulatory framework, to ensure that the enormous costs of the past two years will not be borne again,"

The campaign is on to get Bernanke re-appointed, in fact, most economists want to see Bernanke re-appointed (however I believe it is more out of the fear of getting stuck with Larry Summers). I'm not convinced that Bernanke has been successful and wasn't complicit in causing the financial meltdown. Only time will tell if in fact Bernanke's moves were successful or simply delayed the inevitable (can you say Greenspan?).

I'd like to take you back to a few years ago, before the crisis really began, what was Bernanke saying then (copy of speech):

"We believe the effect of the troubles in the subprime sector on the broader housing market will be limited and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system,"

"vast majority of mortgages, including even subprime mortgages, continue to perform well."

If you don't believe me, watch the video below of Bernanke, Paulson and Bush.

In all fairness if you read my blog during the same time period you would not have found me predicting gloom and doom. However, you will notice that I continually stated the credit and housing foreclosure crisis was serious, not over and not being dealt with (or dealt with correctly). Of course I am also not the scholar that these men supposedly are - wasn't it their job to monitor the system and to prevent what happened?

I'm not confident in the end of the recession (actually, the end of the depression). For me, a recession doesn't end when you have 16% nationwide unemployment that continues to rise (BLS U6 stats). For me, a recession is not marked as over if the Federal Reserve is still the main lender in many credit markets (TALF). For me, the recession is not over if the Federal Reserve is continuing to monetize the debt. For me, the recession is not over when savers are punished by 0% interest rate policies. For me, the recession is not over when nine out of ten home loans are made by the federal government and the FHA is the main lender. For me, the recession is not over when you have so many homeowners being foreclosed on. For me, the recession is not over when the annual federal deficit is projected to be larger next year than this year.

The recession is over if your only measure is the stock market, up now over 50%. However, the stock market hasn't exactly been a great indicator of the future over the past decade.

We have serious issues to be dealt with that are not being dealt with. Stocks are now priced for perfection, God forbid we have any bad news, let alone a terrorist attack, a mutating deadly virus or another Katrina.

I'm an eternal optimist, however I am also a realist. Bernanke is claiming victory, I wouldn't be surprised to see a banner behind his next speech reading "Mission Accomplished". But this recovery is an illusion. It may continue for awhile and stock prices may continue to ascend into bubble territory again as more federal reserve notes are pumped into the system and as the stimulus continues to unfold - but this is not a sustainable policy.

I do not support Bernanke for Federal Reserve Chairman, maybe we should bring back Volcker!

Scott Dauenhauer CFP, MSFP, AIF

Thursday, August 13, 2009

Fannie Mae, Freddie Mac Results Should Concern Bank Investors

More accounting shenanigans to cover up massive losses.

Lauren Tara LaCapra writes:

The fact of the matter is that accounting adjustments played a far bigger role in propping up the bottom line than did any moderation of losses in Fannie and Freddie's core book of business.

The implementation of FAS 115-2, which eases rules on recognizing losses, gave Fannie's assets a positive adjustment of $5.6 billion after taxes and lessened its allowance for future tax expenses by $3 billion. The change boosted Freddie's equity by $8.5 billion -- thereby allowing the firm to avoid drawing additional funds from the Treasury Department.

In a counterintuitive twist, although the housing market -- as measured by home prices, delinquencies, defaults and foreclosures -- continued to sour, the easing of accounting rules allowed Fannie to mark up assets by $823 million. That compares with writedowns of $1.5 billion in the first quarter. Freddie posted mark-ups of $2.9 billion on some assets, and said credit expenses decreased in part because of "enhancements" to its methodology for estimating future loan loss.

Scott Dauenhauer CFP, MSFP, AIF

Bloomberg: Next Bubble to Burst Is Banks’ Big Loan Values:

Jonathan Weil writes

"It’s amazing what a little sunshine can accomplish.

Check out the footnotes to Regions Financial Corp.’s latest quarterly report, and you’ll see a remarkable disclosure. There, in an easy-to-read chart, the company divulged that the loans on its books as of June 30 were worth $22.8 billion less than what its balance sheet said. The Birmingham, Alabama-based bank’s shareholder equity, by comparison, was just $18.7 billion.

So, if it weren’t for the inflated loan values, Regions’ equity would be less than zero. Meanwhile, the government continues to classify Regions as “well capitalized.”

The rest of the article outlines some of the weird things going on with accounting and loans. This is an echo to what Elizabeth Warren has been saying.

Scott Dauenhauer CFP, MSFP, AIF

Toxic Assets: The Problem Isn't Over (VIDEO)

You will not believe what you hear in this video....maybe you will.

Scott Dauenhauer CFP, MSFP, AIF

Monday, August 10, 2009

Unemployment Didn't Fall - Numbers Lie

247,000 people lost a job in July, yet the unemployment rate fell from 9.5% to 9.4% and everyone celebrated (stock market up over 1%). The recession is over can be heard from nearly every media outlet, yet few seem to see that this report was not good. The report was better than the previous month, but unemployment did not actually fall. So how did the unemployment rate fall by .01%? 422,000 people in July gave up looking for work, thus they were no longer reflected as "looking for a job". These people for the most part still WANT a full time job, they just haven't been able to find one and have for one reason or another stopped looking. Using the broadest measure of unemployment about 16% of Americans are out of work or working part-time (but want full time work).

Do these numbers sound like cause to celebrate? I will admit that it is better to have 247,000 lose a job than over 500,000 - the rate of unemployment decline has fallen (for now) and that is good news. However, the celebration took place over the unemployment rate dropping - which it didn't - they just shifted the numbers.

Scott Dauenhauer CFP, MSFP, AIF

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Wednesday, August 05, 2009

Cash-for-Clunkers + Idiocracy = "Idiocranomics"

I'll forgive you if you haven't seen the movie Idiocracy, I fell asleep three times watching it, but laughed several times in between. The take away is that the world becomes increasingly stupid to the point that everything is manufactured by one company and (spoiler alert) no crops can grow because they are watered with a Gatorade type drink. Why do I bring this up? I believe that Cash-for-Clunkers is "Idiocranomics". The linked to piece by Cumberland Advisors does a great job of explaining some of the really dumb elements and why this program is simply a waste of money, a perpetual waste of money to the tune of at least $150 million a year in ongoing interest (assuming the senate passes the second $2 billion).

The senate is set to pass an additional $2 billion for this program this week, bringing the total we will hand out to $3 billion dollars. The top incentive is $4,500 (the lowest is $3,500). What is interesting is that if you divide $3 billion by $4,500 you get the following number: 666,666 potential cars that qualify...that's not a nice number (remember the stock market hit a low 666 this year on the S & P 500).

I say all of this only to point out that despite what some economists are saying is stimulus, this isn't. In a previous post I quoted Peter Schiff on this topic, you should read it. Latte anyone?

Last year a big stimulus package was passed by congress and the Bush administration and I commented about how stupid it was - the stimulus had zero affect. This program is further proof of the dumbing down of economics. I don't claim to be an expert economist or even an economist (as if that would be a claim to royalty), but I do know that I'm not dumb enough to fall for the notion that Cash-for-Clunkers is a good policy for the economy - its just another in what has been a long line of "idiocraconomics" policies.

Scott Dauenhauer CFP, MSFP, AIF

Schiff: Recession is Over: Long Live Depression

Peter Schiff, the economist made famous for predicting the current economic downturn has called an end to the recession (as have I) and declared that we are now in a depression (as have I, here). Keep in mind I'm not predicting a return to the Great Depression, simply argueing that the US is in a small "d" depression and we have to make structural changes to get out of it.

Schiff comments:

In truth, because of the continued profligacy of the government and Federal Reserve, the imbalances that caused the current recession have actually worsened. We are now in an even deeper hole than when the crisis began. Rather than wrapping up a recession, we are actually sinking into a depression. If things look better now, it’s just because we are in the eye of the storm.

He goes on to say:

In order to lay the foundation for real and lasting recovery, market forces must be allowed to repair the damage. However, current policy is counterproductive to this end. Trillions in stimulus dollars have kept the party going, but now what? How does deficit spending by the government address the problems that brought about the crash? It doesn’t; it just delays and worsens the hangover – and we have to hope we don’t die of alcohol poisoning.

By interfering with the unpleasant forces of the recession, we simply trade short-term gain for long-term pain. By propping up inefficient companies that should fail, we deprive more effective companies of the capital they need to grow. By holding up over-valued asset prices, we prevent the prudent or less well-off from snatching them up and, in doing so, creating a new price equilibrium based upon reality. By maintaining artificially low interest rates, we discourage the very savings that are so critical to capital formation and future economic growth.

My favorite part of his post is in regards to Cash for Clunkers - a program which is anti-American and downright stupid:

The recently passed “cash for clunkers” program (currently on-hold, as it ran out of funding in one week) is a perfect example of how government policy can make the economy worse. By incentivizing Americans to destroy fully paid-for cars so they can go deeper into debt buying brand new ones, the government weakens an already crippled economy.

The last thing we want to do is subsidize Americans to go deeper into debt by buying more stuff. Don’t they realize that is precisely the behavior that got us into this mess?

Think about it this way. If your friend were in trouble because he had too much debt, would you encourage him to take on even more? Wouldn’t a real sign of progress be a reduction of debt, even if he had to cut back on his everyday expenses? What is true for an individual is also true for a collection of individuals, even if they call themselves a ‘government.’

Schiff may seem like another Dr. Doom, but read the article and tell me if what he says sounds ridiculous - how much longer can our nation continue to spend recklessly without paying a price.

Scott Dauenhauer CFP, MSFP, AIF

OminSans: Five Reasons the Market Could Crash This Fall

Those of you who are my clients or know me can attest to the fact that I have no idea where the market is headed in the short term, though I do have opinions about it. Currently I lack the confidence that is now so present in so many publications. I don't know if the market is going to soar another 50% or drop 50%, though if I had to choose only would be the latter. I think stocks are overvalued given the structural problems in the economy.....but Mr. Market doesn't listen to me (and thats probably a good thing). There is no lack of doomsday prognosticators out there, yet they actually seem to be making logical extrapolations. Take for example the article linked to above, it gives the following five reasons stocks "could" crash:

1. High Frequency Trading Programs driving trading volume
2. Market volume declined most since 1989
3. 13 million Americans exhaust unemployment by December 2009
4. Rally is a short squeeze, nothing more
5. The $1 Quadrillion time bomb....derivatives

The last one is perhaps the scariest. I'm not going to talk about each of these market crash scenarios, you can just read the article, but its the last one that really makes my skin crawl. The chart in this post shows the exposure our American banks have to is downright stomach churning.

Am I a bull or bear.........I don't make those distinctions. I simply think risk/reward is disappearing in stocks at these levels.

Scott Dauenhauer CFP, MSFP, AIF

Monday, August 03, 2009

Tax Revenue Falls Fastest Since the Great Depression

First, this is my 600th blog post for The Meridian!

The good news is that the S & P 500 broke the 1,000 level today or a 50% increase from the March lows. The bad news is that the economy is still very, very sick. Tax revenues have plummeted and social security and medicare are growing broke even quicker than originally thought. The structural underpinning of our economy is coming unglued...but at least the stock market is up.

I'm not convinced our economic woes are over and truthfully it would be a good thing if they weren't. If we recover to quickly and forget what happened and what led up to 2008/09, we may not attempt to fix the problems. If we don't fix the problems they will come back and much worse.

Scott Dauenhauer CFP, MSFP, AIF