Monday, April 30, 2012

The financial press seems surprised that Spain and England are slipping back into recession. Since the response of those countries to the financial meltdown of 2008 was to implement austerity measures, which means cutting government spending, there was no other possible outcome. It is not rocket science. The US chose stimulus first and today we have an economy with sluggish growth and an increase in the budget deficit, but we have the means to address the deficits and excessive federal spending. As I mentioned before the government must save the economy first and then it will be in a position to address the longer term structural issues. In the US the private sector is doing fine while the public sector is in contraction. The overall effect is enough growth to allow us to work on our large fiscal problems.

Things I believe about the US economy:

Unemployment will remain high. Perhaps we need to rethink our educational assumptions. As a country we think that if you graduate from a prestigious college after paying enormous tuition the world will greet you with open arms. Most employers will tell you that upon graduation, the student does not know how to do anything useful.

Real Estate prices are still in a correction and the final correction will surprise all of us who own houses. All it takes is a ride around the neighborhood to see sales are sluggish and all the press about an incipient recovery might just be the Real Estate agents pumping up the business

Interest rates and inflation will remain low. Occasionally there will be a spike in the price of a particular commodity but overall prices will increase modestly.

All these factors mean growth will be sluggish but unlike the Europeans positive.

Wednesday, April 18, 2012

Earlier this week the shareholders of Citibank rejected the pay packages granted by the board to the top executives. It is a non-binding vote but 55% of the shareholders basically told the people running the bank "we don't think you are worth it". Good for them. Citibank couldn't get the go ahead from the Fed to increase their dividend but they want to pay the head of the bank 15 million dollars. Why? This vote is great on two levels. First it tells the bank the shareholders are not going to be sweet talked into giving away money to executives who don't perform and second it indicates that shareholders are getting more involved in the working of the companies. Both trends are a signal that some good is coming out of the 2008 debacle in the financial sector.

Europe continues to bubble along. This week it is Spain's turn to be put under the microscope. The Spanish economy has close to 25% unemployment, Argentina just seized a significant part of a Spanish oil company's South American holdings, the Spanish banks are under pressure concerning their solvency, and the borrowing cost for the Spanish Government went up at the last auction. It is like a logic test; complete this sentence- Iceland, Ireland, Greece, Portugal, Spain ___. The winning answer is Italy. International investors have to be heading for the hills; the hills in this case are either London real estate or the US Government market.

There are indications that the NYC real estate market is showing signs of life. Recent statistics and news articles point to an increase in properties selling. This does not seem to be the trend in the surrounding suburbs where things are sluggish. Maybe the NYC activity is pent-up demand or the benefit of low interest which makes buying cheaper than renting. The unusual part of this scenario is Wall Street did not have a good year in re compensation and a pick up in NYC real estate would seem to be an anomaly.

Wednesday, April 11, 2012

Europe reminds me of an outing I once attended. The outing was for bond traders after a really nasty stretch in the market. I would walk up to a trader from another firm and ask " How are you doing?" and they would all reply "we are doing fine but I hear so-and-so is getting crushed" I would then approach so-and-so and ask the same question and get the same reply all the way around the room. The European countries are all in the same bucket and the European Central Bank has bought some time by increasing liquidity recently but by no means is any of it over. Stayed tuned and keep your helmet on.

As the presidential race starts in earnest I hope the conversation will be focused on big issues and big ideas. I saw an ad for Citibank in the Times over the weekend. The ad traced major efforts by the bank since it's inception in the 1800's. The print copy shows a time line and lists the bank's efforts i.e. financed the Panama Canal, supported the Marshall Plan etc. The bank's most recent accomplishment according to the ad is they are the first credit card approved for Google wallet. The bank apparently equates the Panama Canal with a credit card you can use with an electronic encyclopedia. Somewhere Teddy Roosevelt is rolling in his grave. We need to build for the future and invest in our infrastructure. Currently one political party's platform is to drill for oil everywhere and don't pay for birth control pills. The other party can't seem to articulate a reason why they passed health care reform or what exactly the Dodd- Frank bill means.

I have mentioned previously that the US economy paused or flattened out during the 1Q 2012. I think this is reflected in the current sell off of the stock market. I think economic activity is still some form of OK and will continue for the next few years. The Federal Reserve will disappear from the scene the closer we get to the election and since interest rates are so low there is nothing more for them to address. I don't think there will be any more quantitative easing nor should there be. They best policy is to let the economy recover slowly, accept the economic dislocations associated with this and build a solid foundation for the future.

Monday, April 2, 2012

The first quarter of 2012 is in the books. Stocks were up, oil was up, US Treasuries were down, car sales were up, US corporate debt was up and housing was sluggish. This scenario points to a consensus that the economy is in some stage of a recovery. I think this is true. Business people will tell you that while business is not where they would like it is definitely better than last year and they are hopeful about the future. At the end of the last administration and the beginning of the current one the executive branch and Federal Reserve chose to bail out the financial sector and stimulate the economy. Our current recovery indicates that these decisions were correct. The next part of the process should be getting our spending and borrowing under control. This is the tricky part of the equation given the current rancorous political environment and our addiction to low interest rates. Weaning the country and the government off these extremely low interest rates will be a difficult test for the Federal Reserve.

After 2008 the regulators (FINRA, SEC, Controller of the Currency etc.) always talk about "lessons learned" rather than dealing with their complete failure to do their jobs in a professional manner. What I don't understand is how can a MF Global situation occur in 2011 and why are the same people still in charge of the regulatory agencies?

Nobody contributed more to the financial crisis than Moody's Investor Service. Now Moody's is desperate to prove they are relevant and are taking every opportunity to make pronouncements about credit and sovereign debt without ever having established they possess any ability in these areas.