December 11, 2008
You can’t watch a news program these days without hearing some “happy talk” about how our dismal economy is “on the verge of recovery”. You have to remember that many of these shows are sponsored by brokerage firms. That fact must be taken into consideration when you decide how much weight you will give the opinions of the so-called “experts” appearing on those programs to tell you that the stock market has reached “the bottom” and that it is now time to jump back in and start buying stocks. Similarly, those people interested in making a home purchase (i.e. millionaires, who don’t have to worry about getting a mortgage) want to know when the residential real estate market will hit “bottom” so they can get the best value. If I had a thousand dollars for every time during the past six months that some prognosticator has appeared on television to tell us that the stock market has “hit bottom”, I would have enough money to start my own geothermal power utility.
People interested in making investments have been scared away from stocks due to the pummeling that the markets have taken since the “mortgage crisis” raised its ugly head and devastated the world economy. If those folks believe the hype and start buying stocks now, they are taking a greater risk than the enthusiastic promoters on TV might be willing to disclose.
People just don’t like bad news, especially when it is about the future and worse yet, if it’s about the economy. On Friday, December 5, the stock market rallied, despite the dismal news that November’s non-farm employment loss was the greatest monthly employment decline in 34 years. More than half a million people lost their jobs in November. Despite this news, all of the major stock indices were up at least 3 percent for that day alone. Have all these people bought into the magical thinking described in The Secret? Do that many people believe that wishing hard enough can cause a dream to become reality?
There is one authority on the subject of economics, who earned quite a bit of “street cred” when our current economic crisis hit the fan. He is Nouriel Roubini, a professor of economics at New York University’s Stern School of Business. He earned the nickname “Doctor Doom” when he spoke before the International Monetary Fund (IMF) on September 7, 2006 and described, in precise detail, exactly what would bring the financial world to its knees, two years later. In this time of uncertainty, many people (myself included) pay close attention to what Dr. Roubini has to say by regularly checking in on his website. On December 5, we were surprised to hear Doctor Doom’s admission to Aaron Task (on the web TV show, Tech Ticker) that his own 401(k) plan is comprised entirely of stocks. Dr. Roubini explained that he is not in the “Armageddon camp” and that for the long haul, stocks are still a good investment (although currently not a good idea for investors with more short-term goals). Upon learning of this, I began to wonder if the revelation about Doctor Doom’s stock holdings could have been the reason for the stock market rally that day.
Yesterday, I had the pleasure of meeting Dr. Roubini at a lecture he gave within staggering distance of my home. I was able to talk to him about my concern over Federal Reserve Chairman, Ben Bernanke’s idea of having the federal government purchase stocks in order to pep-up a depressed stock market. How could this possibly be accomplished? How could the Fed decide which stocks to buy to the exclusion of others? Dr. Roubini told me that the government has already done this by purchasing preferred shares of stock issued by the banks participating in the TARP program. He explained that rather than purchasing selected stocks of particular companies, the government would, more likely, invest in stock indices. Before I get to Doctor Doom’s other points from his lecture, I will share this photo taken of yours truly and Doctor Roubini (who appears on your left):
Dr. Roubini told the audience that he believes this recession will be worse than everyone expects. During the next few months, “the flow of macroeconomic news will be awful and worse than expected”. He opined that people are going to be surprised if they think that the stock market “bottom” will come in mid-2009. He expects that by the end of 2009 “things will still be bad” and unemployment will peak at 9% in early 2010. He thinks that the consensus on earnings-per-share estimates for stocks during the next year is “delusional”. He anticipates risk aversion among investors to be severe next year. We are now in a global recession and this has caused commodity prices to fall 30%. He pointed out that commodity prices could still fall another 20%. He considers it “very likely” that between 500 to 600 hedge funds will go out of business within the next six months. As this happens, the stocks held by these funds must be dumped onto the market. With respect to the beleaguered residential real estate market, he pointed out that home prices could fall another 15-20% by early 2010.
The good news provided by Dr. Roubini is that the global recession should end by the close of 2009. However, he expects recovery to be “weak” in 2010. He surmised that the possibility of a systemic meltdown has been minimized by the actions taken at the recent G7 meeting and most particularly with the G7 resolution to prevent further “Lehman Brothers-type” bankruptcies from taking place. He concluded that this recession should be nothing like the Japanese recession of the 1990s, which lasted nearly a decade.
So there you have it: The news (almost) nobody wants to hear. You can say these are the predictions voiced by one man who could be wrong. Nevertheless, given Dr. Roubini’s track record, I and many others hold his opinions in high regard. Now, let’s see how this all plays out.
Avoiding The Kool-Aid
November 5, 2009
All right . . . “Turbo” Tim Geithner didn’t really say that (yet) but we’ve all seen how his actions affirm that doctrine. Former federal banking regulator, Professor William Black, recently criticized Geithner for not protecting the taxpayers when Turbo Tim bailed out CIT Group to the tune of 2.4 billion dollars this past summer. CIT has now filed for bankruptcy. Henry Blodget of The Business Insider described Professor Black’s outrage over this situation:
After Tuesday’s election defeats for the Democrats in two gubernatorial races, the subject of “bailout fatigue” has been getting more attention.
Acting under the pretext of “transparency” the Obama administration has developed a strategy of holding meetings for people and groups with whom the administration knows it is losing credibility. Jane Hamsher of FiredogLake.com has written about the Obama team’s efforts to keep the disaffected Left under control by corralling these groups into what Hamsher calls “the veal pen”. She described one meeting wherein Rahm Emanuel used the expression “f**king stupid” in reference to the critics of those Democrats opposing the public option in proposed healthcare reform legislation.
A different format was followed at what appeared to be a “message control” conference, held on Monday at the Treasury Department. This time, the guest list was comprised of a politically diverse group of financial bloggers. One attendee, Yves Smith of Naked Capitalism, described the meeting as “curious”:
Michael Panzner of Financial Armageddon and When Giants Fall adopted Ms. Smith’s description of the event, adding a few observations of his own:
The most informative rendition of the events at the conclave came from Kid Dynamite, whose two-part narrative began with a look at how Michael Panzner interrupted a Treasury official who was describing the Treasury’s current focus “on reducing the footprint of economic intervention cautiously, quickly and prudently”:
Kid Dynamite’s report contained too many great passages for me to quote here without running on excessively. Just be sure to read his entire report, including Part II (which should be posted by the time you read this).
David Merkel of The Aleph Blog also submitted a two-part report (so far — with more to come) although Part 2 is more informative. Here are some highlights:
John Jansen from Across The Curve included his report on the meeting within his usual morning posting concerning the bond market on November 4. In a subsequent posting that afternoon, he referred his readers to the Kid Dynamite report. Here’s what Mr. Jansen did say about the event:
The report at the Accrued Interest blog drew some hostile comments from readers who seemed convinced that Accrued was the only blogger there who actually drank the Kool-Aid being served by the Treasury. Their reaction was easily understandable after reading this remark (which followed a breach of protocol with the admission that Turbo Tim was there in the flesh):
Huh? All I can say is: If you like being in powerful bowels, just take a cruise over to duPont Circle. Actually — it was at his next statement where he lost me:
— and then it was all downhill from there.
The administration’s “charm offensive” has moved to the dicey issue of financial reform, where it is drawing criticism from across the political spectrum. Given the fact that they have all but admitted to a strategy of simply reading The Secret and willing everything to get better by their positive thoughts — Michael Panzner might as well start writing Financial Armageddon — The Sequel.