Posts Tagged ‘unemployment’

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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Posted in Banking, Federal Reserve Actions, Politics, Stock Market Actions | No Comments »

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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Posted in Economics, Emerging Markets, Politics | No Comments »

Federal Reserve Statement

Wednesday, May 20th, 2009

Judge for yourself, but it looks like according to the US Federal Reserve the outlook has not improved. The economy has continued to “contract” and their hope is resting on the stimulus and the Federal Reserve’s steps it has already taken. They cite household spending has seen signs of stabilizing, “but” with continued job loss, declining housing wealth and tight credit, it still is “constrained. There has never been a time in history where fighting a credit crisis with credit has ever won. Maybe it isn’t a lack of credit, but too much credit in the system.

Here is a copy of their statement released today at 2:00 PM EST:

Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of financial and economic developments.

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Posted in Economics, Federal Reserve Actions | No Comments »

The Economic Wave Set

Thursday, May 7th, 2009

Warren Buffet has been quoted as saying that the larger the stone dropped into water the bigger the waves. The stone dropped that started this financial crisis was definitely a large one. Here is my interpretation of the waves that follow the stone dropping. These waves can overlap but traditionally are made up of peaks and troughs.

The “stone” dropped was the Real Estate market bubble popping. The stone impacting the water was in September 2009 when the financial markets all but shut down clogged with bad debt. When the financial system receives a shock as it did in September, the effects are felt in waves.


The first wave typically comes in the form of fear. If you asked the average US citizen what happen in September 2009, most would not be able to detail the actual impact. But this fear causes the average US consumer to stop spending as much and plan for the worst. During this financial crisis the initial fear coupled with real estate prices falling, caused an extreme contraction in consumer spending. Since 70% of US GDP comes from consumer spending, this contraction leads to the second wave.

The second wave is usually a direct result of the first wave. When consumers spend significantly less, companies are forced to reduce inventory to match this new reduced demand. This reduction in inventory typically causes high unemployment. High unemployment leads us to the third wave.

The third wave again is usually a direct result of the second wave. High unemployment with reduced consumer spending leaves a supply surplus. Actual goods surplus is reduced by lowering prices to what consumers are willing to spend to spur demand. With less demand overall for goods and services, square footage becomes a surplus, which is commercial real estate.

I believe that near term future of the US economy is largely dependent on the third wave. If the consumer can put aside their reduced wealth, fear of job loss and return to over consumption then the economy should start to recover (for the short term). If the consumer cannot jump start the economy, then commercial real estate could be the next stone dropped and we would start all over.

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Posted in Real Estate | No Comments »

Banks Profitable – That was Easy

Thursday, April 16th, 2009

Okay so here we are again, it is earning season and to the market’s surprise banks are showing some profits. When I make the above statement I can’t help to picture a older man in a suit riding a bike with training wheels saying “Mom look, I can ride a bike”.


All it took was nearly a trillion dollars to suppress mortgage rates; billions of dollars of direct aid, small change to Market to Market accounting and a commitment from the US government indicating they will not them fail.

Meanwhile earnings of companies who do not have the favor of the government are falling rapidly. Housing starts again appear to be retrenching (remember this was a pillar which Wall Street put such angst on citing recovery). A large commercial real estate firm (holds over 200 malls across America) filed for bankruptcy protection today with a disclosed $29.6 billion in assets and $27 billion in liabilities. What banks are on the hook for that?

The US economy cycles through expansion and contraction of credit. This process has occurred for centuries. Since the Federal Reserve started to maintain control of the overnight bank rate the cycles have become somewhat more predictable. This predictability occurs because as the Federal Reserve identifies where the US economy is in a cycle it responds with a rather predictable action. This action has a somewhat predictable response.

When the economy approaches over expansion of credit the Federal Reserve raises the overnight bank rate to raise the cost of lending, which theoretically should slow growth. When the economy starts to contract credit, the Federal Reserve lowers the overnight bank rate to lower the cost of lending, which theoretically should spur growth.

The actions to save banks over the past year are meant to contribute to the above mentioned goal. The US Government and Federal Reserve are attempting to reduce the cost of lending to spur growth. The dilemma that is facing the United States is that currently its citizens are contracting out of fear. The average US citizens’ mindset has changed from over consumption to conservation. Since US consumers makes up about 70% of GDP, growth cannot occur without them.

To stabilize the US consumer you most likely need to improve unemployment to reduce this fear. This week showed an improvement in claims (attributed to the holiday week) but continued claims are still rising (over 6 million). This indicates that finding a job is still a challenge. For job growth to resume, someone needs to start hiring. The US government is attempting to take this role artificially with their behemoth stimulus they passed.

It appears the US government is attempting to put training wheels on its economy by trying to shoulder the weight on their own. These banks that have already had the training wheels attached are profitable off the actions of the US government, at the expense of the US taxpayer. I was under the impression that companies went out of business because not enough business to support them. What happens when (if?) the US government takes off the training wheels? Will the economy ride on its own or break a leg?

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Posted in Economics, Stock Market Actions | No Comments »

Positive Housing Numbers! Are they?

Thursday, April 2nd, 2009

So over the past few weeks lagging housing data has shown some signs of hope. We have seen an improvement in existing home sales, new home sales and pending home sales. Mortgage rates are at an all time low and mortgage applications are on the rise.


So what does this data mean in respect to the ailing housing market? Well really in the context of actual numbers, these improvements are relatively small and in a typical market time uneventful. Some see these improvements as a possible bottom forming in the housing market (sound familiar, November 2008 stock market). Others see this as a possible “dead cat bounce” in the real estate market. A “dead cat bounce” refers to a small improvement before continuing down.

Real Estate values are still declining according to the S&P Case Shiller index data released March 31rst, 2009 which showed that average housing prices are back to 2003 levels. Also more than half of sales are distressed. The increase in sales is definitely positive, but many of these sales are speculative which does not help the stabilization of pricing. Just like in the stock market, you need individuals buying with the intention of staying (no flipping) to stabilize prices.

Unemployment is on the rise and the world economies are continuing to weaken, which will add to large company layoffs especially if they rely heavily on overseas revenue. High unemployment does not help the housing.

Mortgage rates are being artificially suppressed by the US government, what happens when they stop supporting them? What should mortgage rates really be? Rates are at extreme lows, shouldn’t sales reflect this extreme a little more to the upside. If we do slide into a deflation spiral, then real estate prices will most likely fall more which would wipe away the benefit of the lower rates.

Real Estate was bought and sold like stocks over the past 8 year, so more than likely it will correct the same way. It is typically not a good idea to try to catch a falling knife, but if you are buying and selling into this market at the same time, then I guess it would be a wash.

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Posted in Real Estate | No Comments »