“I looked at my 401K and it’s now a 201K ba-dum-bum-CHING!" So, the joke goes today, but, don’t look now, it’s a 177K based on the S&P 500 as shown below. If you were able to buy the inverse of the change in the National Debt during the same period, your 401K would be a 485K. Interestingly, invested in gold it would be about the same, 498K, and with the 30 year Treasury bond you’d have a 544K for the same period. So much for hindsight, but much to be said about asset allocation.
The water torture nature of the decline in equity values, without the capitulation everyone has been waiting for, as well the disappearance of Bear Stearns, Lehman Brothers, Merrill Lynch, and the implosion of AIG, Bank of America, Citi, GM and, now, even GE, speaks worlds about the gravity of the situation. AIG has become a bottomless pit into which we have dumped $170 billion in taxpayer’s money and now have 79.9% ownership of an asset that seems destined to become a black hole of unknown proportions. While President Obama’s sincerity in following through on promises for health care reform and other social issues is applauded – and highly trumpeted on the government’s new web site http://www.recovery.gov/ -- if our financial institutions entirely fail, everything else becomes meaningless.
Paul Volcker gave one of the clearest explanations as to how we got to this point in a speech he gave in Canada a couple of weeks ago, saying “this phenomenon can be traced back at least five or six years. We had, at that time, a major underlying imbalance in the world economy. The American proclivity to consume was in full force. Our consumption rate was about 5% higher, relative to our GNP or what our production normally is. Our spending – consumption, investment, government — was running about 5% or more above our production, even though we were more or less at full employment. You had the opposite in China and Asia, generally, where the Chinese were consuming maybe 40% of their GNP – we consumed 70% of our GNP.”
Full text: http://www.ritholtz.com/blog/2009/02/paul-volcker/
He argued, “in the future, we are going to need a financial system which is not going to be so prone to crisis and certainly will not be prone to the severity of a crisis of this sort.” In effect the Glass-Steagall Act that had been enacted during Depression 1.0 separating commercial and investment banks -- and had been repealed in 1999 thanks to Phil Gramm and other deregulation zealots– needs to be reinstated during this Depression 2.0. Where is Paul Volcker to lead the way back to the 401K?
October-07 401K
November-07 383K
December-07 380K
January-08 357K
February-08 344K
March-08 342K
April-08 359K
May-08 362K
June-08 331K
July-08 328K
August-08 332K
September-08 301K
October-08 251K
November-08 232K
December-08 234K
January-09 214K
February-09 190K
March-09 177K
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Saturday, March 7, 2009
Thursday, March 5, 2009
Publishers Gone Wild
HarperCollins Puts Its Money on New ‘It Books’ Imprint
http://www.nytimes.com/2009/03/05/books/05harper.html.
“Tapping into the zeitgeist” with the “It Books” imprint? “The collected works of Twitterdom”? Please pass the barf bag.
Instead of recognizing that the publishing industry needs to set itself apart from the fierce competition of other media, doing what only it can do well – like discovering and publishing new fiction and meaningful non-fiction -- they run like a moth to the flame. They want people to turn from TV, movies and the Internet to books by publishing the very kind of content best suited for their competition, content aimed at those who are addicted to the competing media? “Escapism, fun, and style” in book form -- lots of luck with that kind of strategic thinking. Might as well send those titles directly to the remainder tables.
Makes publishing nothing sound like a more attractive strategy. http://lacunaemusing.blogspot.com/2009/02/plastics-and-publishing.html
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http://www.nytimes.com/2009/03/05/books/05harper.html.
“Tapping into the zeitgeist” with the “It Books” imprint? “The collected works of Twitterdom”? Please pass the barf bag.
Instead of recognizing that the publishing industry needs to set itself apart from the fierce competition of other media, doing what only it can do well – like discovering and publishing new fiction and meaningful non-fiction -- they run like a moth to the flame. They want people to turn from TV, movies and the Internet to books by publishing the very kind of content best suited for their competition, content aimed at those who are addicted to the competing media? “Escapism, fun, and style” in book form -- lots of luck with that kind of strategic thinking. Might as well send those titles directly to the remainder tables.
Makes publishing nothing sound like a more attractive strategy. http://lacunaemusing.blogspot.com/2009/02/plastics-and-publishing.html
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Wednesday, March 4, 2009
Brother, Can you Spare a Dime?
Only about $57 billion more to go until the Public Debt tops $11 trillion. Since I last wrote about this on January 12 http://lacunaemusing.blogspot.com/2009/01/bailout-math-and-implications.html it has soared by some $332 billion, so the $11 trillion mark is just around the corner. Something I failed to notice before: the government gratefully accepts “contributions” to reduce the debt (no kidding) so I include the appropriate information from the government’s web site:
How do you make a contribution to reduce the debt?
Make your check payable to the Bureau of the Public Debt, and in the memo section, notate that it is a Gift to reduce the Debt Held by the Public. Mail your check to:
Attn Dept G
Bureau Of the Public Debt
P. O. Box 2188
Parkersburg, WV 26106-2188
http://www.treasurydirect.gov/govt/resources/faq/faq_publicdebt.htm#DebtOwner
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How do you make a contribution to reduce the debt?
Make your check payable to the Bureau of the Public Debt, and in the memo section, notate that it is a Gift to reduce the Debt Held by the Public. Mail your check to:
Attn Dept G
Bureau Of the Public Debt
P. O. Box 2188
Parkersburg, WV 26106-2188
http://www.treasurydirect.gov/govt/resources/faq/faq_publicdebt.htm#DebtOwner
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Thursday, February 26, 2009
The Brave New World and the Economy Converge
Once in a while our local paper, The Palm Beach Post, gets a leg up on the rest of the newspaper media, covering a South Florida story that is probably gaining traction in other parts of the country. It is certainly a sign of our times, bioethical issues colliding with the consequences of financial hardship. The headline says it all: More people choosing to turn their bodies into money-makers. http://www.palmbeachpost.com/search/content/local_news/epaper/2009/02/24/0223body4cash.html Besides selling mundane body components such as blood, plasma or one’s hair, eggs and “womb rental” are in demand and pay big bucks.
Donating eggs can fetch $5,000 while rent-a-womb surrogacy can “net from $18,000 to $70,000, whatever the couple and the carrier agree to.”
Interestingly, there is a Catch 22: “not everyone qualifies as a donor, and women whose only reason to volunteer is that they're broke are often rejected.” So, if you really need the money, don’t bother to apply.
Furthermore, egg donors must be non-smokers, which is understandable, but they must also agree to take injections of fertility drugs, hopefully not to the degree to produce a litter as the Californian octuplet mother.
The Boca Fertility IVF Center “once had only one catalog of donors. Now there are two binders with a total of 100 donors. They include blondes, brunettes, whites, blacks, Asians, even Jewish women, who used to be difficult to find.” As the economy deteriorates, genetic engineering or selective breeding could be on the rise.
"O wonder!
How many goodly creatures are there here!
How beauteous mankind is!
O brave new world!
That has such people in't!"
(Shakespeare's The Tempest from which Aldous Huxley derived the title of his famous novel).
Economists, meet the Bioethicists.
.
Donating eggs can fetch $5,000 while rent-a-womb surrogacy can “net from $18,000 to $70,000, whatever the couple and the carrier agree to.”
Interestingly, there is a Catch 22: “not everyone qualifies as a donor, and women whose only reason to volunteer is that they're broke are often rejected.” So, if you really need the money, don’t bother to apply.
Furthermore, egg donors must be non-smokers, which is understandable, but they must also agree to take injections of fertility drugs, hopefully not to the degree to produce a litter as the Californian octuplet mother.
The Boca Fertility IVF Center “once had only one catalog of donors. Now there are two binders with a total of 100 donors. They include blondes, brunettes, whites, blacks, Asians, even Jewish women, who used to be difficult to find.” As the economy deteriorates, genetic engineering or selective breeding could be on the rise.
"O wonder!
How many goodly creatures are there here!
How beauteous mankind is!
O brave new world!
That has such people in't!"
(Shakespeare's The Tempest from which Aldous Huxley derived the title of his famous novel).
Economists, meet the Bioethicists.
.
Monday, February 23, 2009
Taking a Break in Key West
I need a break from the constant drumbeat of downbeat news, Russian and American satellites colliding in space, British and French nuclear submarines colliding deep under the Atlantic, and the spiraling economic Armageddon, chasing an unknown vortex. I hark back to the happier times of the recent holidays when we visited Key West with our son.
Jonathan and I shared a camera. We apparently have a similar eye, as I can no longer remember exactly who took what picture. My father was a professional photographer and I would like to think a little of it rubbed off on me, but Jonathan has the advantage of being born into the digital generation and manipulates the features of a digital camera as second nature. Here he is “working” on my first computer, an Apple II, almost thirty years ago.
We walked through Key West’s less frequented side streets. It was a beautiful December day, not humid, temperatures in the 80s. Some of the photos illustrate Key West’s iconoclastic nature, some its beauty, and others the passage of time and disrepair.
Attitude Free Zone
It Don’t Come Off
Roof Shadows
Jonathan and I shared a camera. We apparently have a similar eye, as I can no longer remember exactly who took what picture. My father was a professional photographer and I would like to think a little of it rubbed off on me, but Jonathan has the advantage of being born into the digital generation and manipulates the features of a digital camera as second nature. Here he is “working” on my first computer, an Apple II, almost thirty years ago.
We walked through Key West’s less frequented side streets. It was a beautiful December day, not humid, temperatures in the 80s. Some of the photos illustrate Key West’s iconoclastic nature, some its beauty, and others the passage of time and disrepair.
Attitude Free Zone
Sliver Moon Fence
It Don’t Come Off
Roof Shadows
Tropical Leaf
Key-West-Mobile
Balcony Beer Bottle
A Sailor’s Delight
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Friday, February 20, 2009
Moral Hazard of Loan Modification
One can empathize with Ric Santelli’s widely heard rant and the reaction in the Blogosphere: http://www.fundmymutualfund.com/2009/02/rick-santelli-speaks-for-silent.html. No doubt the people who played by the book have the short stick in the $75 billion Homeowner Stability Initiative (“HSI”), but unless some way can be found to deal with the twin time bomb of mortgage foreclosures and more importantly, jobs and the threat of further job loss, the economy will continue to disintegrate.
There are people in homes who are employed but who borrowed too much or at terms that they can no longer afford, and who now may be motivated to simply walk away from their home and rent down the block and save a bundle. Hopefully, this group will be the plan’s focus. Yes, if they walk their credit rating will become impaired, but outside of that it becomes a simple business decision. How the HSI deals with principal reduction has a weighty bearing on the moral hazard issue.
Proposals that involve reducing the mortgage principal balance have called for banks or the taxpayer (whoever takes the hit for the lowered principal) having a “call” on the appreciated value of the home (over the new principal amount) if the home is sold in the future. So, if the home’s original mortgage was based on, say, a principal of $300k and the new principal is $200k, the bank/taxpayer would be entitled to the appreciated (assuming there is any) difference between $200k and the selling price in the future up to the original principal value. The problem with that approach is why would the seller bother to hold out for a price above $200k – there is no incentive (unless in the unlikely event the home can be sold for more than the original principal amount) – or would the bank then take it over as a foreclosure? Seems to me the bank/taxpayer needs a phased in participation in the selling price to avoid foreclosure down the road, or to provide incentive for the homeowner to get the best possible price, keeping government and/or the bank out of those logistics.
Thus, as far as principal reduction is concerned, the devil is in the detail, and it is here that the core moral hazard issue seems to lie. Other approaches of lowering the mortgage interest rate or converting adjustable rates to an affordable fixed rate or increasing the loan term are more straightforward and quantifiable and would seem to be easier to deal with – from a moral hazard perspective -- than principal reduction. It certainly makes sense to find a way to help people who are employed and can afford a reasonable monthly payment to stay in their homes.
.
There are people in homes who are employed but who borrowed too much or at terms that they can no longer afford, and who now may be motivated to simply walk away from their home and rent down the block and save a bundle. Hopefully, this group will be the plan’s focus. Yes, if they walk their credit rating will become impaired, but outside of that it becomes a simple business decision. How the HSI deals with principal reduction has a weighty bearing on the moral hazard issue.
Proposals that involve reducing the mortgage principal balance have called for banks or the taxpayer (whoever takes the hit for the lowered principal) having a “call” on the appreciated value of the home (over the new principal amount) if the home is sold in the future. So, if the home’s original mortgage was based on, say, a principal of $300k and the new principal is $200k, the bank/taxpayer would be entitled to the appreciated (assuming there is any) difference between $200k and the selling price in the future up to the original principal value. The problem with that approach is why would the seller bother to hold out for a price above $200k – there is no incentive (unless in the unlikely event the home can be sold for more than the original principal amount) – or would the bank then take it over as a foreclosure? Seems to me the bank/taxpayer needs a phased in participation in the selling price to avoid foreclosure down the road, or to provide incentive for the homeowner to get the best possible price, keeping government and/or the bank out of those logistics.
Thus, as far as principal reduction is concerned, the devil is in the detail, and it is here that the core moral hazard issue seems to lie. Other approaches of lowering the mortgage interest rate or converting adjustable rates to an affordable fixed rate or increasing the loan term are more straightforward and quantifiable and would seem to be easier to deal with – from a moral hazard perspective -- than principal reduction. It certainly makes sense to find a way to help people who are employed and can afford a reasonable monthly payment to stay in their homes.
.
Monday, February 16, 2009
Another Shoe to Drop
Turn the bailout hose this way. Here is one waiting for a future one of unknown proportions: “Government pension agency braces for recession” http://biz.yahoo.com/ap/090216/pension_bailout.html
The magnitude of the potential problem is best understood by going to The Pension Benefit Guaranty Corporation’s web site www.pbgc.gov for a description of its mission. The PBGC “is a federal corporation created by the Employee Retirement Income Security Act of 1974. It currently protects the pensions of nearly 44 million American workers….PBGC receives no funds from general tax revenues. Operations are financed by insurance premiums set by Congress and paid by sponsors of defined benefit plans, investment income, assets from pension plans trusteed by PBGC, and recoveries from the companies formerly responsible for the plans. PBGC pays monthly retirement benefits, up to a guaranteed maximum, to more than 631,000 retirees in 3,860 pension plans that ended. Including those who have not yet retired and participants in multiemployer plans receiving financial assistance, PBGC is responsible for the current and future pensions of about 1,274,000 people.”
The PBGC already has an $11 billion deficit but the astounding part of the article cited above is the former Director, Charles Millard’s contention that “a new investment strategy, which allows the PBGC to invest more aggressively in stocks and alternative investments, makes it less likely that it will need a multibillion-dollar congressional bailout.”
That is the “strategy” to “protect” current and future pensions? Here is yet another government “safety net” that is not only vulnerable to the economic downturn but also has hitched it’s star to the future prospects of the stocks and alternative investments.
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The magnitude of the potential problem is best understood by going to The Pension Benefit Guaranty Corporation’s web site www.pbgc.gov for a description of its mission. The PBGC “is a federal corporation created by the Employee Retirement Income Security Act of 1974. It currently protects the pensions of nearly 44 million American workers….PBGC receives no funds from general tax revenues. Operations are financed by insurance premiums set by Congress and paid by sponsors of defined benefit plans, investment income, assets from pension plans trusteed by PBGC, and recoveries from the companies formerly responsible for the plans. PBGC pays monthly retirement benefits, up to a guaranteed maximum, to more than 631,000 retirees in 3,860 pension plans that ended. Including those who have not yet retired and participants in multiemployer plans receiving financial assistance, PBGC is responsible for the current and future pensions of about 1,274,000 people.”
The PBGC already has an $11 billion deficit but the astounding part of the article cited above is the former Director, Charles Millard’s contention that “a new investment strategy, which allows the PBGC to invest more aggressively in stocks and alternative investments, makes it less likely that it will need a multibillion-dollar congressional bailout.”
That is the “strategy” to “protect” current and future pensions? Here is yet another government “safety net” that is not only vulnerable to the economic downturn but also has hitched it’s star to the future prospects of the stocks and alternative investments.
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