Archive for November, 2009

Ice Cream for Everyone – Well Maybe Not Everyone

Monday, November 30th, 2009

So unemployment has taken the center stage in politics. It was not really important when unemployment was 9.8%, but now it is 10.2%, double digits changes everything. The answer according to the US political powers is stimulus, more and more stimulus. Even know stimulus has really never worked as designed, maybe this time they will get it right, right?

My belief is that economics needs to be broken down into the smallest piece to the individual US citizen. What works for an individual should work for the economy as a whole.

To date the US government has taken the position that the government needs to fill in the demand holes with stimulus by borrowing money. If the US government borrows 1.5 trillion dollars and then spends it into the economy through stimulus, this “growth” in the economy (gdp) should bridge the gap according to the current powers.

What if an individual did the same thing as the US government? Okay so Suzy gets a pay cut and the she decides to adopt the same philosophy as her government. Suzy takes her credit cards and decides to go on a spending spree matching her lost income. Suzy does not just use her credit cards to pay current bills, but she also uses it to redo her kitchen. Suzy lost $30,000 in pay, but she spent $30,000 on her kitchen and other none essential items to make up for the lost income. Did Suzy make up her lost $30,000 in income? Is her situation better after spending the $30,000? Did she reduce or increase her risk?

The answer to the above questions seems relatively obvious to me. If you lose income a budget is the solution not a spending spree. If 70% of the US economy comes down to the US consumer, shouldn’t our rules be their rules?

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The Straw that Could Break the Camel’s Back

Thursday, November 26th, 2009

The US Government and Wall Street have declared an end to the worst of this financial crisis that has plagued the world for so long. Is it really over, have we crossed the worst of it?

I am reminded of a common movie scene where the characters are climbing up a mountain to get to safety only to find a seemingly endless set of mountain ranges. The risk with declaring an end may be the straw that breaks the camel’s back. Can we take the double dip? What happens to the US consumer if there is another bout of mass layoffs.

There is no short of predictions for the future equally positive and negative. The current momentum seems to rest much of the world recovery on emerging markets and a weak dollar. Stimulus in the US has failed to create a meaningful impact on unemployment and the credit market has shrunk even with the massive bailouts last year. The US housing market has been kept on life support with government supported interest rates and tax rebates. My real concern is that nothing that has been done really is sustainable. Over the past year the US government has thrown money at everyone but its tax payers. Maybe the real solution is to let us spend our own money and when I say “us” I mean everyone regardless of income.

Interesting that Washington DC over the past years seems to have become just as disconnected to Main Street as Wall Street. Has Wall Street moved into Washington? Over the past year I have had discussions with many people who have lost their jobs or had a pay cuts, not one of them ever mentioned healthcare as a major problem right now.

Happy Thanksgiving! The Emerging Market of Dubai’s possible credit problems may give a new meaning to Black Friday or just another straw on the camel’s back.

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What a Tangled Web We Have Woven – Inverse Dollar Market Relationship

Thursday, November 12th, 2009

Simply put, the US economic recovery will be short lived if it depends on the dollar going to zero. By design the current US political powers wanted exactly what is happening, weak dollar improves exports and large companies overseas earnings. Unfortunately this prescription for recovery reduces the buying power of the largest consumer in the world, the USA.

This plan for recovery unfortunately seems to leave out one all important component, the US Citizen. Wall Street is getting back to their country clubs at the expense of the 10.2 % unemployed (and growing) by shorting the US Dollar and crowding the commodities trade. Remember last year when the political powers vilified investors who shorted bank stocks, well isn’t shorting the Dollar kind of un-American. What percentage of those banks bailed out where owned by foreign investors.

Over the recent quarter large companies have credited a large portion of their recovery to overseas sales. McDonalds over the past week announced sales for last month showing that US sales were down, but overseas sales were up. If you are a US Citizen you may or may not have money invested in the stock market, but you definitely have Dollars.

One thing is for sure, if you are an American, this recovery is hurting you.

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Dow 15,000 = $10 Soda?

Wednesday, November 4th, 2009

The Dow Industrial Average has rallied from 6,500 to just over 10,000 in a matter of months. Great news right? Maybe not if you consider at what expense, literally.

In my view the US economy is like a large aquarium. If you lean it in one direction the level may seem like it is going up on one side, but it is always at the expense of the other.

This stock market rally (Since March 2009) is undeniably at the expense of the US Dollar. Every time the dollar is weak the Dow is strong. This weakness in the dollar causes commodities to go up and US buying power to go down. So if the Dow manages to soar another 50%, don’t be surprised when your cost of living soars with it.

The famed “Dr. Doom” Nouriel Roubini has been expressing his concern over the “carry trade” where investors are borrowing dollars (shorting) and buying commodities. Many asset managers of recent have referred to the short dollar trade as “crowded”. This “rally” seems more like a another misuse of leverage. Looks like Wall Street gave up drinking by switching to beer.

Dow Industrial in red and US Dollar in green

Dow Industrial in red and US Dollar in green

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