Archive for February, 2009

Mortgage Bailout or Voter Buyoff?

February 18, 2009

President Obama unveiled his latest bailout plan today. It is a $75 billion plan to give irresponsible homeowners a partial free ride on a home they could not afford.  This is done by burdening all responsible homeowners with ever increasing federal debt AND even worse, preventing the market from clearing the home inventory overhang. In fact, the aura of housing market price manipulation is perhaps the least appreciated flaw in this bailout scheme.

By and large we aren’t talking about homeowners who were laid off or who have suffered medical setbacks. They certainly exist and may, emphasize may, be deserving of some assistance. No this bailout is aimed directly at the reckless and the stupid who bought homes they could not afford with money they did not have.

The pro-bailout argument, heard repeatedly on CNBC and elsewhere is that if “we” don’t bail “them” out then homes in “our” neighborhood will be foreclosed and “we” will suffer a price decrease. It is hard to believe that people with a triple digit IQ making, well, lots of money can make that argument with a straight face. By that logic if my neighbor loses money in a mutual fund I need to bail him out in order to preserve the value of my mutual fund. If my neighbor is at risk of having his car repossessed I need to bail him out or my car will lose value. Apparrently no one anywhere should take any kind of loss ever for any reason whatsoever because it will lower the value of everything everywhere. Where does it end?

Asked another way, what reasonable person will now trust the manipulated “market value” of a home? The claim that a foreclosed home in my neighborhood will diminish my market value may or may not be true. If it was the buyer who bought what they could not afford and a new set of responsbile home buyers appears then I suffer little or no drop in value. If the home was overpriced as well then I deserve to lose some value since my home too is likely overvalued. Too bad for me.

But if homes that should have been foreclosed upon are left in the hands of reckless buyers in order to prevent a drop in value then the market value of all homes are being manipulated by the government. Why would a responsible person trust such a manipulated market value. Who will buy a home whose value is manipulated? What would be a fair price? How would anyone know? What will now happen to home prices? And if I want to sell will the government let me price my home lower than my neighbors? Won’t that also lower their value? Will we end up with a socialized housing market?

Frankly, I believe that all the bailout schemes are directed not at economic salvation but the salvation of the Democrat voter/donor base. Now to be honest I believe the Bush bank bailout was aimed at friends of Ben, principally the Goldman Sachs crowd that has run the treasury for multiple administrations. If you look closely at the Obama bank bailout it isn’t quite as friendly on the surface but underneath the noise the banks continue to get what they want. The car company bailout and the mortgage bailout, every bailout actually is aimed at protecting, preserving and rewarding the Democrat voter/donor base.

For me this Machiavellian outlook explains a great deal about the  design of the bailouts since Economics 101 is clearly not at work. If a bailout is not expressly aimed at the voter base, as in the UAW in the case of the car companies then step back and ask where’s the money? Goldman Sachs, all the former investment banks as well as most corporate executives are big time donors to the Democrats. Got to protect that voter/donor base. So, let’s buy their financial support and votes with taxpayer money and we’ll call it a bailout to protect the little guy. Nice.


Who are the bailouts for? Cars or UAW?

February 17, 2009

So GM and Chrysler may need as much as $39 Billion just to stay in business for another year or so? My guess is they will get it but not until there’s a bit of political finger wagging and tsk, tsking. Oh yeah, there will be some corporate penance to be paid and some lip service about labor but in the end they’ll get the money. Why?

Because the car companies are the conduit for financial support for tens of thousands of workers all of whom belong to the UAW. And in turn those workers are just conduits for their UAW dues. And those dues are the basis for huge (over $500 million in the 2008 election year for Democrats!) campaign expenditures and political donations. Not to mention the tens of thousands of “volunteers” and of course, the voters. Almost all of whom will be sure to vote Democrat in thanks for saving their jobs. So, yeah, the car companies will get their bailout. And a huge chunk will end up in Democrat coffers just in time for the 2010 election cycle.

Five Year Investment Plan

February 16, 2009

Investing for 2009-2013                                                   February 16, 2009



Starting in mid 2008 the US and world economies began a serious and potentially long lasting retrenchment. This was the result of a multi-year credit and leverage expansion of extraordinary proportions. As credit was retracted marginal demand for goods and services declined and as a result, a wide variety of asset values declined dramatically. This resulted in additional credit contraction, additional loss of demand and subsequent asset value reduction in a negative self-reinforcing spiral. As of the current date this process has not yet fully completed.


I believe today’s circumstance actually began in May of 1989. That was the start of the last major downward spasm of the Greenspan Fed. The Fed Fund rate was reduced from an interim high of nearly 10% in May 1989 down to a low of 3% in September 1992 that was then held for some 18 months. One could postulate a lagging connection between this downward rate spasm and the 1990’s tech boom (see Fed Fund chart below). The resulting liquidity fueled the internet and technology boom which in turn propelled the stock market in general and NASDAQ in particular to record heights. As the chart below indicates (basis S&P 500 Index) the market rallied to new highs in mid 2000 only to collapse following the dual blows of the bursting of the tech bubble and the September 11, 2001 terrorist strike.

Chart of S&P 500 Index 1995-2009  (

Chart of S&P 500 Index 1995-2009 (


What happened next was another aggressive effort by the Greenspan Fed (see chart below) to drastically lower interest rates to what were 40 year lows by providing massive liquidity to the banking system. Fed chairman Greenspan kept rates low and kept supplying liquidity for a full two years. This massive injection of money into the economy had to go somewhere. Bond yields were low and the stock market was a bust so the money bubble was translated into a 5 year housing bubble. Why housing? Because the bursting of the technology bubble frightened investors away from the stock market and the tsunami of baby boomers decided, en masse, to buy houses. Real estate, as everyone knew was a solid and stable investment destined to rise forever. Or so it was thought. That they were aided and abetted by a corrupt Congress and feckless administration does not reduce their individual culpability. Multiple homes, extreme leverage, option ARMS, no down loans and the whole raft of opportunities to profit in real estate lured the unsuspecting few and the great mass of intentional speculators alike.

Fed Funds Target Rate 1980 - 2008

Fed Funds Target Rate 1980 - 2008


As the housing bubble grew so too did the stock market. Ever rising housing values begat mortgages, home equity loans and mortgages with cash outs that were sliced and diced and sold multiple times to hedge funds, banks, private equity groups, money managers, mutual funds and anyone who could breathe without thinking. Layered on top were CDS’s, CDO’s, MBS’s and a who’s who of alphabet soup derivatives levered one on top of the other often with no connection to the underlying asset. Eventually the good times ended and beginning in the middle of 2008 markets, credit and economies world-wide just died. The recession/depression of ‘aught 8’ had begun.

The Fed, now led by Ben Bernanke thought they knew what to do and so, as Greenspan did before him, Ben dropped interest rates to record lows and pumped massive amounts of liquidity into the banking system. Alas, his ZIRP (zero interest rate policy) has, as of the current date, had little to no known effect. Proponents will claim – without justification or proof – that ZIRP and TALF and TARP have kept the damage from being even worse. Opponents, of whom I am one, contend that ZIRP, its siblings and cousins have set the stage for even worse problems down the road. Examining Japans policy prescriptions we can see that their outcome was the loss of two – so far – decades of economic growth. This suggests that the US policy will produce more of the same. And why not? We have the same prescription just a different dose. Hard to believe the outcome will be any better than Japan’s.


The chart below shows the percent change, year over year of the Japanese GDP from 1980 through 2008. Over those 29 years the average change in GDP was +1.9% (+2.4% prior to 2008). However, over the 1992 to 2003 period, a total of 11 years, the average change was only +1.0%. The -12.7% GDP drop that occurred in 2008 is the worst Japanese GDP showing since 1974. All these average GDP growth rates, whether for the entire 29 years or the lost decade of 1992-2003 hide the effects of the 1980’s Japanese bubble and the disastrous 1990’s and 2008 crashes. All this in spite of massive injections of liquidity, a series of perhaps a dozen stimulus programs, infrastructure programs and exhortations for the Japanese people to borrow and spend. All this effort has yet to succeed. Most critically, all that government spending, all the borrowing and all the injections of liquidity have not yet translated into generic inflation. Japan is still fighting deflationary forces. Contrast Japan with Sweden.

Japan's YOY Percent Change In GDP

Japan's YOY Percent Change In GDP


Japan, in the late 1980’s and early 1990’s had a real estate and stock market bubble that burst. They followed that with bank bailouts that are roundly credited with creating a series of zombie banks that were technically insolvent but permitted to survive. It wasn’t until sometime in the early 2000’s that Japan finally closed and/or merged the zombie banks out of existence. The United States appears to be following the Japanese playbook instead of the Swedish playbook. The Swedes took the financial bull by the horns, nationalized troubled banks, closed others down, reorganized their financial system, and sold the cleaned up banks back to the private sector. Did it hurt? Yeah, but it seems to have worked.

Japan's Nikkei Index 1988-2009 (

Japan's Nikkei Index 1988-2009 (




If, as I believe the US is following the Japanese financial playbook then our stock market is equally likely to follow the Japanese market. Not in lock step but very likely in the same general pattern. The chart above vividly shows the Nikkei hitting a record high in 1990 and then (with some inter-period rallies) selling off until 2003. There followed a rally, like every other national stock market until mid 2008 when the bottom fell out all over again. A global financial bubble had burst.


So what is an individual investor to do? Here’s what to do. I conclude that the stock market is not the place for an investor. A trader can perhaps do well, but not an investor. Since I am attempting to determine how to invest I must look beyond the stock market. I have chosen two areas: (1) private equity and (2) bonds. Both of these options require explanation.


I am a small investor so the usual hedge funds and private equity groups will only sneer at me. However, I can follow similar principals by purchasing a small business. Is that risky? Sure, but then again, so is doing nothing. A buy and hold investor would have lost anywhere from 20% to 40% of their investment last year. Even well diversified portfolios suffered substantial losses. Buying a well run small business on the other hand allows the owner to have a direct role in the success or failure of the enterprise. I can buy a million shares of GE (about 10 billion shares outstanding) and never have a single word on how it is run. But I can direct my small business as I see fit. But that’s not the place for 100% of my portfolio.


The second area of investment is income oriented. Or, more properly it is a mix of money market and bond funds. Given the potential cash requirements of a small business a reasonable amount of cash must be readily available. The banks won’t lend it after all. The balance of my portfolio will go into a mix of Vanguard mutual funds: intermediate-term investment grade corporate bonds (VFIDX); intermediate-term high yield corporate bonds (VWEHX); and a cash reserve in the prime money market fund (VMMXX). The two bond funds currently provide a combined yield of 7% or better. But what about the potential for loss of principal when interest rates soar? And clearly interest rates must soar as a result of the inevitable inflation that simply must follow the recent series of stimulus plans; liquidity injections and massive government borrowing? Don’t they?


First, what inflation? All the official talk is about deflation not inflation. Not that I believe government officials. But once again look at Japan. Did they have inflation? Well, they had a little. Too little actually, since they’ve spent the past twenty years trying desperately to re-inflate their economy. Yes, I believe inflation is a monetary phenomenon. Yes, I believe that the US will eventually suffer a serious bout of inflation. But when it will suffer I do not know. A recent comment I read was eye opening. First, we have to accept that inflation is a monetary phenomenon that results from too much money chasing too few goods. Anyone noted too few goods lately? Not really since demand, world-wide has diminished significantly. But suppose demand begins to rev higher? As that writer pointed out there is ample capacity for goods producing in China and all of Asia (Near-East, Middle-East and Far-East). The US and Europe too have room for that matter. I do not belittle the prospect of inflation. I lived through the gas lines and price controls of the 70’s. I had an 11% mortgage in the 80’s. I do assert that at this point in time, and probably for the next few years, inflation will not be the primary economic issue that worries many of us. Further, most of us are on high alert in case inflation rears its ugly head. So we are less likely to be taken by surprise as happened in the 1970’s and 1980’s.


So, I have purchased a small business along with an operating partner. He is responsible for daily operations and earns a salary and equity. I receive a 10% cash distribution as long as all goes well. And as the financial dust has settled a bit, I have recently begun to move from 100% cash into the two bond areas. That process will continue, slowly, as I dollar average in on a monthly basis. That part of course is quite easy. Some readers may wonder how to buy a small business? Advertise. Read advertisements. I believe there are any number of well run small businesses that could be interested in a financial partner who can bring some value added advice and consultation. Another alternative is to corral several other individuals, pool your resources and purchase stakes in several small businesses. Use a good lawyer, take your time, investigate thoroughly and ensure you and the current owner can work together.


Lowering Expectations

February 15, 2009

An article on RedState observed that the Obama administration is rapidly working to lower expectations for its brand new stimulus package. In that regard:

I briefly listened to a Maryland Congressional Representative this morning (Sunday, Feb 15) as she was speaking on Fox News. She noted that Maryland had some large amount of “shovel ready jobs” all approved, permitted and just waiting for the stimulus package to fund. Okay, swell. But will those jobs go to the currently unemployed?

Or will they go to the existing employees of the existing engineering and contracting firms? In other words, will these “shovel ready jobs” be new jobs for newly unemployed or ongoing jobs for the currently employed in which case there will be no new stimulus, unemployment will continue to rise and the national economic problems will continue to fester.

“Second Thoughts On Stimulus”

February 11, 2009

From “The Daily Reckoning” in an article regarding the stimulus, TARP II and the supposed loss of confidence in the economy being a big issue.

“Or, as economist Dr. Roger Garrison writes in a chapter on the Austrian theory of the business cycle, “The loss of confidence comes from the realisation that the economy is overextended, asset values cannot be supported, and decisions about how to allocate capital have been based on a false cost of capital and the false level of demand it ‘stimulated.’ You don’t fix any of that with new stimulus.”

Consider that thought when the government tries to help restore confidence in our economy by printing money and throwing it at the banks.

How to cure a credit hangover – more credit

February 11, 2009
Comment on article by James Stewart:
Mr. Stewart,
I’ve long read your articles and admired both the writing and your ability to (almost) always be making money buying and selling various securities. Good for you.

(Now I go off-topic for just a moment.) Then you whined about Auction Rate Securties and demanded that the government make you whole. You who, if anyone, qualifies as a sophisticated investor complaining about an investment you made with your eyes wide open. But for fractions of a point in extra yield you ignored the risks and when your money got trapped you whined for government to save you.

In the same vein (back on-topic now) now you are whining for the government to save the economy. Our economy is suffering a credit hangover and your prescription is more of the same. As other posters made clear, Keynesian spending did not cure the 1930’s depression and it sure as heck hasn’t helped Japan.

We have not even reached the recessionary depths of the 1980’s when Reagan and Volcker killed inflation yet you and a whole host of smart people are stomping your collective feet for a multi-trillion spending program THAT YOU HOPE will “cure” this recession.

I do not admire President Obama nor his Democrat colleagues nor the three LIBERAL Republicans for passing this monstrosity. I do admire the few Democrats that opposed it, I do admire the majority of Republicans that opposed it and yet it will pass. It is a political instrument designed solely for the 2010 elections to preserve and protect the Democrat majority. While I am as angry at President Bush as anyone there is no hope for any positive change from President Obama. This nation, my child and my grandchildren will pay an enormous price for my generations failure to pay the bill for the services we abused.

Obama: Hope for the Right Change

February 10, 2009

(letter submitted to WSJ on January 20, 2009)


I am a fan of the writer, Charles Krauthammer though I occasionally disagree with his opinions. He has referred to Senator Barack Obama, soon to be President Barack Obama as “The Anointed One”. This appellation has the appropriate acronym, TAO as in Taos, New Mexico a hotbed so to speak of New Ageism and ardent believers in myth. And myth is what I am afraid surrounds President Obama.


The near hysterical media adulation for President Obama has destroyed any remaining vestige of either objectivity or responsible journalism. The media instead is busily building a New Camelot myth around the forthcoming administration as a near carbon copy of the old Camelot myth surrounding President Kennedy and his administration. The current generation of journalists, is so eager for its own New Camelot that it is now blind to its responsibilities to the public or history.


All this myth is predicated on President Obama being the great agent of change that the people have long sought to provide the salvation for our contemporary and historical ills. As TAO he will right all wrongs and cure all ills or so the myth goes. Within the aura of the myth is the belief that the change wrought by TAO will be the right change. From outside the aura it appears that the supplicants believe that the change to be wrought is whatever change the supplicant desires. Hence they hope for change.


I too, hope for change but only if it is the right change. I am outside the myth, a non-believer in TAO and extremely skeptical of the media barrage. Indeed, much is made in the media of the groundswell of support for TAO and the overarching hope for his success. Not merely bipartisan support but across generations and genders, red staters and blue. The media desires a hero and will do whatever it takes to create one. Whether TAO deserves this adulation is beside the point. He is TAO and his will be done – and it will be right. Or else.


Unlike the crowds I do not hope for the success of TAO. I do not hope for his failure either. My fear, my concern, my caution is predicated on the reality that if TAO succeeds might America fail? This is not a contradiction but a genuine prospect that if TAO succeeds he may only do so at the cost of destroying the America that created him. Will civil rights succeed finally? What will be the cost? Will it destroy the freedom to associate, to speak, to assemble? Will the nation be subjected to a speech code as in so many of our universities and colleges? Will homosexuals finally succeed in wrenching a civil rights label to their portion of the myth? What will be the cost to assuage liberal white guilt and black anger?


How will our economy survive? If even a Republican President is willing to sell our industry to the state, for the greater good of course, what hope is there for America under TAO and his army of anti-market advisors? Will America seek to join the European Union? Will we emulate them so thoroughly that the flame of opportunity is extinguished under the blanket of social justice? Will the power of the state to control the economy finally reach such proportions that we no longer have a market economy but an American version of the Chinese state run economy? Have we already reached that point?


What will America’s enemies make of TAO? Will they bow in awe as the media presupposes or will they exploit his myth to attack from without and within? Make no mistake our enemies are out there, waiting, eager to destroy America and her great purpose. Will TAO become the Great Appeaser? So eager for agreement will he offer America’s allies as gifts? Will he send soldiers to their death and risk the destruction of the myth or will he prevaricate and pontificate until the political winds are clear?


The columnist, E.J. Dionne once wrote that he admired TAO for being deliberate and not rushing to make decisions. This was in response to the McCain campaign that quickly offered a plan to save the economy in late 2008. Not until days later, after the media ridiculed McCain and the political winds were obvious, did TAO produced a plan. In many respects similar to the McCain plan but different enough that all the supplicants, including E.J. Dionne, could embrace the calm wisdom of TAO. From inside the aura of the myth all was well.


From outside it appeared that TAO had no plan, waited until the political winds were obvious and only then produced a plan designed to appease and appeal. A plan to resolve the ills of the economy was not necessary. TAO had spoken. All was well in the New Camelot. This I fear will be the hallmark of the new administration. Deliberate until the political winds are clear, offer an appeasement plan regardless of outcome. Protect the myth at all costs.


I too hope for change. I hope for the right change for America. I do not hope for the failure of the Obama administration but I fear for their success. I hope to be wrong.


Obama’s Economic Plan

February 10, 2009

(From President Obama’s speech February 9, 2009)

“That is why the single most important part of this Economic Recovery and Reinvestment Plan is the fact that it will save or create up to 4 million jobs.”

Not exactly. It won’t create private sector jobs, nor will it save them. What it will do is create a government monstrosity that stifles private sector economic development for many years while hanging a debt weight (pun intended) around our nation’s neck.

“It is only government that can break the vicious cycle where lost jobs lead to people spending less money which leads to even more layoffs.”

That’s only fair since it is only government that created the problem in the first place! When the Fed lowered interest rates to record low levels and kept them there for two years; when Congress repeatedly resisted efforts to rein in Fannie Mae and Freddie Mac; when a Republican administration threw away some 3/4 of a Trillion dollars on a hope and a prayer; yes only government could have created such an enormous  problem in the first place.

This nation has a severe economic crisis but it has not yet reached the levels of the mid 1970’s or the early 1980’s. Yet our institutional leaders seem to be in a panic and are running helter skelter throwing billions and trillions of dollars at the situation on the hope that something, anything works. Meanwhile our political leaders are knowingly using this crisis as a smokescreen to subvert our economic system and create a Euro-socialized system. Note Rahm Emanuels policy statement to not let a crisis be wasted. So we end up with a “stimulus package” of outdated, unneeded, wasteful social spending that the President wants passed and fast so the public doesn’t have time to understand what is being done. It is a disgraceful and dishonest process that we, our children and grandchildren will rue for many years.

Vote No on the Stimulus

February 6, 2009

To:                                                                             February 6, 2009

Rep. Mike McIntyre

Senator Richard Burr

Senator Kay Hagan

As one of your constituents I am asking you to vote no on the current stimulus bill working its way through congress. I firmly believe, as a small business owner, husband, father and grandfather that this bill will not provide the corrective action our economy currently needs. Even worse I believe this billl will make the situation considerably worse and will unduly burden our children for the rest of their lives. While I appreciate the politics of the current circumstances I am asking you to vote no on the stimulus bill.

Moderates? Centrist? Please!

February 6, 2009

Can we stop please? Senators Olympia Snowe and Susan Collins (R-Maine) are NOT moderates nor centrists. They are liberals. Oh sure, when viewed from the perspective of the left wing Democrat side of the political spectrum they may look like centrists but from my side of the political spectrum they are limp liberals (aka RINO’s) hiding under the Republican banner.