Posts Tagged ‘money’

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Wall Street Bonuses – Blind leading the Blind

Monday, January 11th, 2010

Main street America is bracing for the all expected news of coming bonuses for Wall Street executives. When main street is suffering with shrinking credit and high unemployment, why should the source of the problem get a bonuses. Well they made a lot of money over the past year, right? Most of these institutions paid off the TARP funds, so why should they not get bonuses?

First let’s look at how those institutions paid off their tarp funds. Goldman Sachs is believed to be at the apex of Wall Street with their proven track record. How did Goldman Sachs pay off their TARP debt so fast? Last year the US government bailed out AIG by giving them a large chunk of tax payer money. Most of those funds given to AIG passed directly through to institutions that they owed due to bad bets with credit default swaps. Goldman Sachs was the top recipient of $12.9 billion of those tax payer dollars. Goldman Sachs owed TARP $10 billion. Shouldn’t the house be responsible for the bets they take?

They made a lot of money, right? The question is at whose expense. These institutions make a good share of their profits off the consumer. Since credit card rates have gone up and the banks cost of money gone down (fed funds rate), it would seem some of the TARP funds where paid back by the same tax payer who bailed them out.

Who should decide whether these institutions give their executives bonuses? I personally believe that the shareholders should be making the decision, since they are the ones who own the company. Let’s take a look at Goldman Sachs’s top 10 institutional shareholders as of September 30th, 2009 considering 76% of Goldman Sachs is owned by Institutional & Mutual Fund Owners.

4.62% AXA – They provide insurance and asset management services through their subsidiaries around the world.
4.41% Barclay Group – They provide financial services to United States and Europe.
3.72% State Street Corporation – Provides financial services around the world.
3.40% Wellington Management Company – Institutional investment managers.
3.29% Vanguard Group – Provides mutual funds and other financial services.
3.20% FMR LLC – Otherwise known as Fidelity Investments is one of the largest mutual fund providers in the world.
2.14% Price (T. Rowe) Associates – Large mutual fund provider.
2.07% Marsico Capital Management – Financial services and mutual fund provider.
1.76% Janus Capital Management –Asset management and mutual fund provider.
1.70% J.P. Morgan and Company – Large financial services provider.

All of the above institutions have one thing in common and that is they are all investment managers. If you hold a mutual fund or ETF (exchange traded fund) that owns Goldman Sachs, do you vote as a shareholder? The answer is no, the fund manager makes the decision. Do you think the fund manager is going to say no to bonuses?

Whether Wall Street deserves the bonuses or not, one thing is for sure they will do what they want since there is no one to stop them.

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Federal Reserve’s Scary Math

Thursday, December 10th, 2009

In the early 1980’s mortgage rates where above 14% and other debt carried an even higher rates of interest. During the early 1980’s, banks required most home buyers to put down 20% and have spotless credit. For example if a buyer purchased a home for $125,000 he or she would more than likely need to put $25,000 down (20%) and the monthly principle and interest payment at 14% would be $1184.87.

Over the past 25 plus years, rates on mortgages and most debt have fallen considerably. The cause of this decrease in rates is mostly attributed to the Federal Reserve’s action of lowering rates and raising rates to control inflation in the US economy. Clearly the Federal Reserve has viewed the past 2 plus decades as having relatively low inflation thereby lowing more than raising rates (Fed Funds Rate).

Lowering rates more than raising them creates cheaper costs of borrowing thereby making room for more. This cheap money also creates more of a demand for credit. This excessive credit demand led to fierce competition among banks. Competition is definitely a good thing until demand starts to wane. As soon as the credit demand let up this led to banks acting as their own Federal Reserves by creating products that artificially lowered the cost of lending thereby stimulating borrowing.

Most home buyers view a home purchase not by the sales price, but by the down payment and monthly obligation. Now let’s look at the buyer from the early 1980’s with he or she’s $25,000 to put down and the ability to afford $1184.87 monthly payment. This buyer today could afford a $225,000 home with $25,000 down with $1183.08 monthly principle and interest payment with an interest rate of 5.875% and relaxed down payment restrictions. Identical down payments and same monthly, but twice the debt, was the growth in value or debt?

This rather rapid reduction in the cost of money over the past two plus decades has led to an equal increase in the price of cars, education, utilities, etc. Inflation seems to have been masked in credit. The credit markets in the US and around the world nearly collapsed because they had “maxed out their credit”. With the rapid expansion of debt at the end of the road with the Fed Funds rate at 0 to .25% target and lending rates increasing because of diminishing credit quality (except for mortgages because the Federal Reserve is supporting the rates), what’s next? Deflation?

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Ben Bernanke and The Federal Reserve Money Factory

Thursday, December 3rd, 2009

golden-ticketOver the past few weeks Republican Congressman Ron Paul out of Texas has been making a noticeable push to get more transparency out of the Federal Reserve. The Federal Reserve members and its Chairman (Ben Bernanke) have been verbally opposed to the measures that the Congressman is attempting to have enacted. The proposal Congressman Ron Paul is pushing for would allow for an independent audit to be called for following any decisions on monetary policy by the Federal Reserve.

Currently the Federal Reserve keeps most of its dealings a secret. The Federal Reserve believes that by keeping politics and the public view out of monetary policy they will be able to act more prudently and timely without influence. They believe that this independence is crucial to maintaining their objectives.

Some believe that many of the problems today are caused by their objectives. The Federal Reserve’s deliberate reactions to economic events creates a relatively predictable cycle. When the economy contracts, the Federal Reserve lowers rates to expand credit to spur growth with cheap money. When the economy is growing too fast they raise interest rates to slow the growth. Unfortunately, it is much easier to indentify contraction than over expansion, which typically results in a late raising of rates which can result in a bubble.

For the past 25 years the Federal Reserve has lowered rates more than raising them and now is faced with a very troubling 0 to .25% Fed Funds Rate. Interest rates as a whole should be falling, but for credit that is not supported by the government, rates are rising. One can only assume that with banks profit margins so high that the rising rates are being caused by falling credit quality and defaults. The Federal Reserve has resorted to another avenue in attempts to promote lending with “quantitative easing”. Quantitative easing is essentially when the Federal Reserve becomes the lender of last resort. This form of injecting money into the economy can have adverse and unknown consequences, since much of the money is created out of thin air in the form of credit.

Who, what and how they are supporting these institutions seems to be behind Congressman Ron Paul’s motivation. Over this historical Financial Crisis the Federal Reserve’s political powers have been weakened. We will see if this weakness will lead to the Congressman getting his golden ticket.

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GDP First Look – Robbing Peter to Pay Paul?

Thursday, October 29th, 2009

The 3rd quarter showed a 3.5% increase over the 2nd quarter GDP (Gross Domestic Product). According to the preliminary look at 3rd quarter GDP report the primary contributors where (as quoted by the report):

The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment.

Let’s take a better look at the above quote from this widely viewed report.

The first primary contributor according to the report was Personal Consumption Expenditures. The report specifically cited that auto sales accounted for a large part of this upturn. Cash for clunkers is actually quoted by the report as a major contributor to these sales.

Exports are the second contributor named in this report as a large contributor. When the Dollar is cheap so are good that are priced in the Dollar. The news is filled with headlines on how the US Dollar is under significant pressure.

Private Inventory Investment is the next contributor on the list. Over the past year retailers have been shedding inventory to attempt to match supply with current demand. The shelves are empty and they need to be restocked if retailers want to sell products to consumers.

Residential Fixed Investment is named as another large contributor. First time home buyers have been scrambling to purchase homes to take advantage of the $8000 tax credit. In September alone nearly 50% of existing home sales where to first time home buyers. Nearly 70% of existing homes sales in September where under $250,000.

So last on the list is Federal Government Spending. It should be no surprise that Federal Government spending contributed a large portion of 3rd quarter GDP. Looking at what the report cited as the primary contributors to real GDP, I would argue that almost all of the GDP growth was from the government intervention.

The report also sighted the following:

Disposable personal income decreased $20.4 billion (0.7 percent) in the third quarter, in contrast to an increase of $138.2 billion (5.2 percent) in the second. Real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent.

From the above statement I would gather that consumers made less but spent more. Interestingly this current outcome is what the Federal Government wants to happen, spend our way out. With tight credit and rising unemployment, where does the money come from? Credit is what caused this problem, is it really the cure as well. Drug addicts don’t take more drugs to get off drugs do they.

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Stop Fighting the Dollar

Tuesday, April 7th, 2009

The US Government in one breathe attempts to sink the Dollar in the next speaks of a commitment to a strong Dollar. Even with all of their “innovative” methods of sinking the Dollar, it just keeps getting back up. The Dollar of recent has the resilience of a “Rocky” opponent.

So what keeps the Dollar moving up even in the face of such dramatic attempts to keep it down? Probably the most obvious is that the rest of the world is in worse shape than the USA. The old saying goes “if the USA gets a cold, typically the rest of the world gets pneumonia”.


With the US Government printing money at a feverish pace, other countries that are dependent on exports to the USA must do the same to keep their currency in pace. This process seems to extend the financial pain and fuel social unrest.

The Dollar is the Ocean eroding the cost of goods and services in the US, the solutions so far are looking like poor conceived Jetties, which typically cause more harm than good.

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The Wall Street Alchemist –Analysts

Friday, April 3rd, 2009

What job other than a Wall Street Analyst can you be wrong so often and still command such respect? Meteorologist?

Everyday new data is released to the market that can dramatically affect the market action for that day or even several days. This data alone would be less of an impact if where not for the analysts’ estimates that are either met, beaten or missed.


The market interoperates a miss as things are worse than expected. When the data beats the analysts numbers the market views things better than once thought. Lastly when the number is right on, we are status quo.

My question is how we can take the “educated guess” from a small group of people and determine whether the data released is positive, negative or status quo. Most analysts work for the investment community directly, so are their estimates driven by an agenda. These “educated guesses” somehow have become benchmarks. Lately these guesses have moved markets dramatically in short periods of time to the upside and downside.

Are these estimates for professional traders or investors? Should brokerage firms be able to release estimates, since they can have such an impact on the short term markets? Why do the markets seem to trade a step ahead of the news, is it because they set the benchmarks?

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Re-flation Trade! Really?

Wednesday, April 1st, 2009

What is a Re-Flation trade?

Since the US government has pumped so much cash into the system (increasing the US money supply), this should cause the devaluation of the US Dollar (supply and demand), which would in turn drive up the cost of Commodities causing a surge in prices of goods and services (since commodities are priced in the US dollar).


This fear is referred to as “hyper inflation”. So to trade this hyper inflation you should be invested in inflationary hedges (commodities i.e. gold, oil, etc). This phenomenon last occurred in the late 1970’s early 1980’s which happened to be the last commodities bubble. You should note though that interest rates (mortgages, credit, treasuries, etc) were extremely high (10 Year Treasury was at 15.84% in 1981 compared to sub 3% right now) during that same time period which is the opposite of today.

10 Year US Treasury Yield 1963 till 2009

10 Year US Treasury Yield 1963 till 2009

Commodities prices come off their bottoms over the past few months and the inflation watchdogs immediately brace for hyper inflation. Maybe we should actually read the story before jumping to the end. Sometimes the story is s more interesting then the ending.

The US government has taken these dramatic steps to ward off the threat of deflation. The opposite of hyper inflation would be a “deflationary spiral”. During a deflationary spiral prices of goods and services are falling to catch up with falling demand. A deflationary spiral causes high unemployment which actually accelerates the process (for more information see What is Deflation? ).

Instead of just looking at the prescriptions’ possible side effects, maybe we should look at the illness we are attempting to treat. Interesting how strong the dollar has been over the past year, since inflation would mean a weak dollar.

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Posted in Economics, Stock Market Actions | 1 Comment »

Was it Real Growth or just Credit? The Last 30 Years

Sunday, March 29th, 2009

The following two charts are disturbingly similar side by side:


First is the Dow Industrial Average over the last from 1928 till 2006:

Dow Industrial Average 1928 till 2006

Dow Industrial Average 1928 till 2006

The second chart is total US debt as a percentage of GDP from 1923 till 2006:

Percentage of Total US debt to GDP

Percentage of Total US debt to GDP 1923 till 2006

In 1930 the total percentage of US debt to GDP was 270%. What this means that for every dollar of GDP there was $2.70 of debt. Notice the percentage soared as debt was accelerated and GDP was slowed in the early 30’s. This over expansion of credit was primarily responsible for the financial crisis of the 1930’s. It took many years for the population to forget about the dangers of too much credit.

In 2006 the total percentage of debt to US debt to GDP was 331%. So again this means that for every dollar of GDP there was $3.31 of debt. The overall consensus feels that we are again in process of deleveraging. The questions remains is where we stop.

The real question is what came first the credit or the growth? Was the United Sates at a standstill from the 1940’s till the mid to late 1970’s? If the country was not willing to assume more debt than about 150% (plus or minus say 10%) of GDP for some 30+ years and now we are assuming over 300%, was it that extra assumed risk what launched the economy over the past 30 years ?

I understand that over the past 30 years there has been great innovation, but let us not forget that in the previous 30+ years we went to the moon. It seems to me also that much of the technology over that past 30 years can greatly be attributed to the 30 years prior to that. Was the growth over that past 30 years attributed to Engineers and Scientists or some funny math created by financial institutions spurred by an increased appetite for risk?

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Are Bank’s Balance Sheets going Green on the Taxpayers Back?

Thursday, March 26th, 2009

The Federal Reserve and the US Treasury Department have made dramatic moves (at a heavy taxpayer cost) over the past few months to artificially suppress rates to reduce the cost of lending. Unfortunately these actions also reduce money market yields.


Recently large banks have been revealing their surprisingly profitable beginning of the year. I would note that these so-called profits are actually not including further write downs on bad loans they have made.

Are credit card rates at all time lows? Interestingly the other day I received a notice in the mail from a credit card indicating that they were raising their profit margin (prime plus their margin). My credit rating has not changed. Are they raising their profit margins on their good standings customers to help pay for the bad ones? Am I paying for their credit rating being reduced?

So even though prime is at a very low at 3.25% it seems as though credit card rates have managed to stay the same. Could mortgage rates actually be lower than they are now? Are banks gouging us to claw back from the grave?

Consumer spending is down and savings rates are on the rise. It seems to me that the people would rather make more money on their savings than letting banks make more money off of us.

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Government Intervention in the Markets

Monday, March 23rd, 2009

At the beginning of the year I was under the impression that US markets were for the most part “Free Markets”. Recently these free markets have been coming under attack by the United States government. Seems lately like every week our government is formulating a new plan for recovery and forgetting the previous weeks plan. Lately I am likening the US Government to a child with ADD. Every week we are told to have patience, but every week those same preachers are no practicing their own advice.


My personal opinion on the government’s role in coping with an economic crisis is to uphold its current laws and not to create laws out of anger. I would wager that there are many responsible individuals (i.e. fraudulent mortgage practices) who perpetuated and fueled this economic mess illegally that we could prosecute and start on the road of closure. Instead we are focused on issues that stir the social unrest pot and steers a nation down the path of emotional and irrational rule.

I would plead to our leaders to start taking their roles as leaders and not as members of the mob. We are all taught that “fighting solves nothing”, it is just simple wisdom.

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