Wednesday, September 26, 2007

THE MAGIC WAND

9/26/07

Home inventories are at an 18 month high.

Don’t worry—the Fed can “cut rates!”

D.R. Horton is auctioning homes at 50% discounts.

Don’t worry—the Fed can “cut rates!”

Retailers (today Lowe’s and Target—who knows tomorrow?) are feeling the pinch of the housing situation

Don’t worry—the Fed can “cut rates!”

Durable goods orders plunged in August.

Don’t worry—the Fed can “cut rates!”

Lennar lost $514mm last quarter.

Don’t worry—the Fed can “cut rates!”

Sales of existing homes fell 4.3% in August to an annual pace (5.5mm homes) that was the slowest in five years.

Don’t worry—the Fed can “cut rates!”

Northern Rock, which a year ago was the most vibrant home lender in the UK, is going to be sold to the vultures.

Don’t worry—the Fed can “cut rates!”

Oil continues to flit back and forth around $80.

Don’t worry—the Fed can “cut rates!”

Home heating oil prices will be higher than ever this winter.

Don’t worry—the Fed can “cut rates!”

Trade problems with China are heating up in the face of a Kabuki dance of recriminations and mea culpae on both sides.

Don’t worry—the Fed can “cut rates!”

The dollar is at an all time low against the euro and isn’t looking too spry against the pound, the yen, or the Canadian dollar.

Don’t worry—the Fed can “cut rates!”

The European economy seems to be running out of gas.

Don’t worry—the Fed can “cut rates!”

Crazy people are in control, and firming up their grip on power, in the Middle East.

Don’t worry—the Fed can “cut rates!”

Crazy people continue in control in Washington.

Don’t worry—the Fed can “cut rates!”

Israel and Syria are rattling sabers…again.

Don’t worry—the Fed can “cut rates!”

Iran and Israel are rattling sabers…again.

Don’t worry—the Fed can “cut rates!”

Osama bin Laden (You remember…the guy about whom George Bush said “I really don’t think about him much. I don’t care where he is.”) and his minions are rattling sabers again.

Don’t worry—the Fed can “cut rates!”

The American consumer still steadfastly refuses to save money.

Don’t worry—the Fed can “cut rates!”

We still haven’t figured out how we’re going to pay for this war.

Don’t worry—the Fed can “cut rates!”

We still haven’t figured out how to end this war.

Don’t worry—the Fed can “cut rates!”

OJ Simpson is once again dominating the headlines.

Don’t worry—the Fed can “cut rates!”

The heel of my right foot hurts so bad that I sometimes can’t walk on it.

Don’t worry—the Fed can “cut rates!”

I have a weird noise, akin to the sounds emanating from the game “Operation,” coming out of the armrest of my new car, but it always goes away when I get near the dealership.

“Don’t worry—the Fed can “cut rates!”

My fourteen year old daughter is being, well, fourteen years old.

“Don’t worry—the Fed can “cut rates!”

My twelve year old daughter refuses to go to band and my wife insists that she go. Both are stubborn beyond comprehension.

“Don’t worry—the Fed can “cut rates!”

White Castle seems to be reducing the fat content of both the delectable slider and its world famous onion rings, somewhat decreasing the sheer joy of that culinary adventure.

“Don’t worry—the Fed can “cut rates!”

ANYTHING ELSE THAT CONCERNS YOU? WELL…

“Don’t worry—the Fed can “cut rates!”

Wednesday, September 19, 2007

HYPOCRISY, PROFLIGACY, AND THE (NEW) AMERICAN WAY

9/19/07

The Fed has ridden to the rescue again, surprising most observers by cutting both the fed funds rate and the discount rate 50 basis points. In less enthusiastically disseminated news, Congress is working on a scheme that would allow people facing the out of nowhere, who could see this one coming reality of adjustment of their adjustable rate mortgages to refinance via the FHA, even if their homes are so high priced that existing FHA restrictions do not allow for refinancing.

The message is loud and clear: So what if you paid premium prices for poorly structured securities backed by shaky loans secured by grossly overinflated homes? So what if you’re long the debt of a company that was just one foot out of rehab before the debt you bought was heaped on it? So what if you bought far more house than you could afford? (After all, you wanted it, and in America wanting something is the only relevant qualification for any purchase.) No problem: Look! Up in the sky! It’s a meddling Fed! It’s a meretricious Congress! It’s SUPERGOVERNMENT!!!

No wonder risk remains grossly underpriced in our financial markets. No wonder the average American displays the financial savvy of a four year old. (Perhaps I shouldn’t limit this discussion to the United States; the UK government is using the same approach in the cases of Northern Rock, et. al..) The government stands ready to save, protect, and comfort the wealthy, the foolish, and the overextended. Ironically, it is those same recipients of government beneficence and their mouthpieces in the media who so obstreperously decry the evils of “big government.”

The redeeming news for those of us who believe in small government, even when it inconveniences its supposed champions, is that this can’t go on forever. While the markets initially loved the Fed’s actions (Why not? Declining risk premia lead to higher prices for risky assets—Finance 101.), such outwardly anodyne actions by the Fed have had, and will continue to have, a debilitating effect on the dollar. For a country as much in hock as this one, this could be devastating. Further, despite the “Move along, nothing to see here” attitude of the federal government, its statisticians, and the disconnected among the financial community, inflation is a problem and will only be made worse by this latest bout of Fed’s debasement of our currency in an effort to help the far from helpless.

In the longer run, the policy, manifested by both the Fed moves and this latest FHA scheme coming out of Congress with the support, tacit and not so tacit, of the Administration, of having the financial ants bail out the financial grasshoppers will fail. The economics simply don’t work; a society that punishes financial good sense and rewards profligacy cannot stand. I would like to say that the politics don’t work, but given that the financially fatuous compose the vast majority of the American electorate, the politics do work. That is why such idiocy is continually being proposed by the professional politicians who toil away in the District of Columbia at their appointed task of making our lives difficult, complicated, and more expensive.

“WHAT I REALLY WANT, WHAT’S REALLY IMPORTANT TO ME…”

9/19/07

It looks like GM and the UAW are close on a labor contract. Most of the focus has been on the proposed VEBA. While the VEBA and the ameliorative effect it will have on the labor costs of the Big 3 is important, we can judge the merit of this contract by how it handles the JOBS bank, the scheme under which line workers at the car companies are paid even if they don’t work.

As I have said ad nauseam for years, if the JOBS bank is not addressed, the Big 3 will remain at a severe competitive disadvantage to their Asian rivals. Why? Under the JOBS bank, labor effectively becomes a fixed cost. If labor is a fixed cost, it makes sense to produce cars even if they aren’t needed or wanted. After all, you’re paying people; they might as well be producing something, especially when the real contribution margin on cars is astronomically high even at very low prices. Overproduction leads to deterioration in car prices via rebates, cheap financing, and other incentives. Deterioration in car prices leads to deterioration in resale values, especially of those “domestic” cars that are being overproduced. This leads to further downward pressure on new car prices as dealers need more incentives to get deals done. And the downward spiral continues.

It is the lousy resale values of the former that is the primary point of distinction between Big 3 products and the products of the Asian and European carmakers. Big 3 “quality” is, for all intents and purposes, at the same level of that of its Asian rivals, and better than that of the Europeans. Dealer service, while varying from dealer to dealer, is generally at least as good at Big 3 dealerships as it is at dealerships of “foreign” Big 3 competitors. However, it is the poor resale values of “domestic” products that make the purchase of a Big 3 product a bad deal at any but a steeply discounted price. There are exceptions, of course, but not many. For every, say, Caddy CTS one can cite as a pretty good reseller one can cite legions of Ford Tauri, Pontiac Grand Prixs, Chrysler Sebrings, and Ford Expeditions that almost have to be given away at used car lots. The only way to address this problem is by addressing the JOBS bank. If the JOBS bank isn’t addressed, little will have been accomplished in this new contract.

Given my feelings about the impact of the housing situation on the economy generally and on the car business in general (Those on Wall Street who argue that high end marques are not going to feel much impact from the housing difficulties are blind; plenty of “cash” buyers (or lessees) of Lexi, Mercedes, etc. are financing their “just gotta have it” luxury car “acquisitions via “tapping the equity” of their homes.), I am not long any of the Big 3 and remain long the puts of the grossly overpriced Daimler (DAI). My feelings on the Big 3 will become decidedly more negative should progress on the JOBS bank be thrown over the side in exchange for accommodation on a VEBA in these contract talks.

Wednesday, September 12, 2007

Hair of the dog?

9/12/07

On the Opinion page of the 9/12/07 Wall Street Journal, Martin Feldstein argues for a reduction of the fed funds rate “…starting on a path from the current 5.25% to 4.25%, and possibly even less” in response to the problems in the credit markets, to falling housing prices, and to the resultant reductions in consumer spending. Dr. Feldstein argues, predictably, that if the Fed doesn’t act now, we could face (Egads! (Emphasis mine)) recession.

Later in his piece, Dr. Feldstein perhaps inadvertently summarizes the problem by writing:

“The decline in house prices and rise in interest rates will shrink the future volume of mortgage equity withdrawals, causing consumer spending to decline. While the resulting rise in the saving rate would clearly be good in the long term, permitting increased investment in plant and equipment and reduced dependence on capital from abroad, a rapid rise in the saving rate could push the economy into recession.”

By making this statement, Dr. Feldstein touches on the ultimate problem here; unfortunately, he does so in the process of prescribing the wrong solution.

The “sub-prime mortgage” problem, which, as I said in my 3/14/07 post, far transcends sub-prime mortgages, is only one of the manifestations of a much larger malady facing our economy and our nation. As unsophisticated and old-fashioned as this might sound, the problem is that we, as a people, have been living well beyond our means for years now. We spend more than we save, counting on the inflation in the value of our portfolios, taken broadly to include (especially) real estate, to compensate for our utter lack of thrift and to reassure ourselves that everything will be okay; after all, household net worth is in great shape. Yes, household net worth is in good shape because easy credit has inflated the value of our assets at a rate faster than the growth rate of our debt. So net worth is in decent shape because asset values are going up, but asset values are increasing only because debt is being piled up to support the prices of those assets. It all sounds very circular because it is.

This shell game disguises, at least for the financial experts, the problem but does not eliminate or deal with it: We spend too much and save too little. What Dr. Feldstein is proposing is a bromide that will enable this profligacy to continue in order to avoid (Horrors!) a recession. Further, he proposes this hair of the dog even though he knows what the problem is. Like any stiff morning-after drink, Dr. Feldstein’s prescription will merely delay the onset of the symptoms of the underlying disease, making the sickness much more virulent when it finally surfaces, as it inevitably will.

As hard as this might sound to the financial Masters of the Universe who helped get us into this mess and who insist that it is only a bump in the road, the reality is that we cannot live beyond our means no matter what the money wunderkinds would have us believe. We have to start saving again. As Dr. Feldstein points out, a reduction in housing values will force us to start saving again. Given the pig-headedness of the American people, this is perhaps the only thing that will get us saving again, and not only for the reason Dr. Feldstein outlines; i.e., a reduction in housing values and consequent inability of spendthrift Americans to borrow against their homes for such necessities as European vacations, luxury cars, weekly spa treatments, extravagant nights out, and look down your nose private schools. (Dr. Feldstein did not come up with that gratuitous list of grotesque extravagances; yours truly did.) A severe recession will not only seal the home equity piggy bank, it will impress upon people one of the primary reasons we must save: times will not always be good, and we have to save for the proverbial rainy day. And having access to a home equity line of credit does not constitute saving.

The Fed can cut rates all it wants, but, given that the nature of the problem lies not in liquidity but in credit quality (See my 8/18/07 and 8/23/07 posts.), injections of liquidity will not solve this problem. The market will just have to be allowed to sort things out. This will in all likelihood involve a recession. It will hurt. So does necessary (as opposed to the cosmetic type so commonly funded with home equity loans) surgery. But it will have to be endured because we can’t go on much longer without excising the tumor of excessive spending. (See my 8/30/07 post.)

Monday, September 10, 2007

"Trust me on this...it's for their own good."

9/10/07

In today’s (i.e., 9/10/07’s) Chicago Sun-Times, columnist Neil Steinberg wrote an article wondering why self-described “morally superior” people would insist on making the lives of gay people as miserable as possible even though the self-appointed guardians of all things morally pure are convinced that gays will spend eternity in hell. (This brief description does not do Neil’s column justice; you would do well to read it at suntimes.com. In fact, you would do well to read all of Neil’s columns; while I disagree with him on many issues, especially on religion, Neil and I have a remarkably similar world view, characterized by cynicism and general lack of optimism, which I, and I suspect Neil, would characterize as “realism.” For my part, I would some day like to lose this outlook; I’m not so sure Neil feels the same way, but that is another issue. At any rate, I rarely miss a Steinberg column and just as rarely do I not get at least one good laugh out of his writing.) Steinberg invited his readers to please let him know why this insistence on tormenting one’s fellow man is so prevalent and predominant in the lives of people who consider themselves followers of a loving God. I wrote the following letter to Neil with what I think is a plausible answer:


9/10/07

Hi Neil,

I think I have the answer to your query regarding self-described morally superior types’ insistence on tormenting gay people in this world despite the certainty on the part of the tormentors that the tormentees will spend eternity paying for their sins in the fires of Gehenna.

Those who exhibit this odd fixation on the sexual proclivities of gay people insist that being gay is a choice. (This is a very strange notion. I, for example, would no sooner have sex with, say, you or anyone with your particular body parts than I would take a late night stroll on an unlit Dan Ryan Expressway. Yet, the morally certain are convinced that people somehow choose to have sex with people of their own gender because it is, I don’t know, convenient, more widely available, easy, or, I suppose, a sign of rebellion against Americanism as surely as is membership in the Democratic Party. But I digress.) If, according to this line of “reasoning,” we can make those who choose to be gay suffer some horrific consequences for such a choice, then perhaps they will repent of their sins and pursue blameless love lives worthy of such paragons of the “moral” movement as Reverend Ted Haggard and Senator Larry Craig. So, by making the lives of gay people as absolutely miserable as they can, these champions of proper living are seeking to save gays from eternal hell fire. Sort of like destroying a town in order to save it, I know, but I’m just reporting, not defending.

Thanks, Neil.

Sunday, September 9, 2007

YET ANOTHER REASON THAT McCAIN SHOULDN’T, AND WON’T, BE PRESIDENT

9/9/07

This is a note I sent to Chicago Tribune columnist Steve Chapman. I sent it in response to his 9/9/07 column regarding John McCain’s age’s impact on his qualifications to be president. In my opinion, Steve is perhaps the most insightful columnist in the print media:

The point you make regarding John McCain’s age is probably right; no one at the age of 71 should be considering an 8 year, or even a 4 year, gig as president. We saw the consequences of advanced age for a president’s fitness for his job with Ronald Reagan. He was fine, well, okay maybe, at 69 in 1980, but his White House years were not good to him. He seemed more withdrawn and even less intense about his work as the years passed. His second term especially was a time of vacillation. Given Mr. McCain’s propensity for being a more “hands-on” guy than Mr. Reagan, the years will probably be even more unforgiving should he somehow become president.

Further, most anyone who has observed Mr. McCain in action has noticed that he often appears to not be “all there.” The expression “deer in the headlights,” while first widely applied to the richly deserving Dan Quayle, more aptly describes Mr. McCain. When confronted with surprise questions, he often comes out with ridiculous non-sequiturs and smug references to his military service. He is rarely challenged on this tendency, however, because most observers are afraid of the ubiquitous retort from the McCain camp that challenging him on anything is dishonoring his military service. Now that he is under the pressure of a presidential campaign, this tendency to lose touch is coming up with regularity. Witness the “Bomb, bomb Iran” idiocy and the case you cited of Mr. McCain’s calling the youngster with the temerity to question him about his age a “little jerk.”

My first response to your column, however, was not the above, but, rather “Who cares?” McCain is, thankfully, so far out of the race that whether he is too old for the job is moot.

My second response was that I didn’t want to agree with you on the age issue because you could just as well have written a column asking if Ron Paul, who is a year older than John McCain and who now runs almost as well as Mr. McCain in the polls, is too old to be president. Unfortunately, if your conclusion regarding John McCain is correct, it is probably also correct for Mr. Paul. This is indeed regrettable in the latter case. It is even more regrettable that the question is equally moot.