What The Financial Markets Are Telling Us About the Economy
Should we Stimulate? "We're All Keynesians Again."
By blackhedd Posted in Crude Oil | Economy | Markets | Stimulus — Comments (77) / Email this page » / Leave a comment »
The question on all lips in this week's edition of the political fights is: should the Federal government apply a Keynesian stimulus to the US economy, in order to forestall a recession?
You've read no end of answers this week here on RedState and other places. I'm even guilty of stirring the pot myself. I happen not to believe that the kinds of packages being discussed ("fast-acting, targeted at the hardest-hit") will necessarily do anything to improve conditions in the near term, and certainly not in the long term.
But what are the financial markets telling us about the outlook this gloomy Friday morning here in New York? They're telling us they're scared.
Read on...
What is "Keynesian stimulus" anyway? Well, to oversimplify, it comes from the theory that the business cycle arises from the natural ebb and flow of demand for goods and services. There's a lag time between the appearance and the fulfillment of demand, and business tends to overshoot when bringing on new industrial capacity.
That all means that capacity is not perfectly matched to demand, and there are boom times, when demand for labor is plentiful, and bust times, when lots of people tend to lose their jobs.
In theory, then, you can smooth out the cycle by borrowing extra money and just consuming it, during the lean times. That's what a "stimulus package" is all about.
In my critique of Hillary Clinton's stimulus proposal, I explained why this approach won't likely do much good this time around. In short, the Keynesian perspective doesn't model the modern global economy particularly well.
People constantly ask me about the economic outlook. Will we have a recession, or are we already in one? How bad will it get? The only honest answer I can give is: I don't know. (I can speculate, and I am speculating, but it's neither fair nor smart to do that in public.)
But one of our cherished free-market dogmas is that markets discount all available information.* And the markets are just as confused as anyone these days. Let's take a peek at what they're trying to say.
US Stock Markets: That's the headline, and it's been consistent. They're at a 10-month low, down a good 10% in less than two weeks. That's a frighteningly fast decline. It means the broad outlook for corporate profits is perceived to be weak.
And yet most of the damage is confined to a few sectors. Corporate earnings are actually not all that bad, except for companies in the financial and housing sectors. That suggests that, as expected, the current slowdown (whether or not it's a recession) won't result in widespread job losses. That's also an argument NOT to apply Keynesian stimulus.
I won't try to predict the course of the stock market. Much will depend on what the Federal Reserve does with monetary policy. Not much will depend on whether the Congress and the Administration choose to stimulate. Even more will depend on the perception of better growth opportunities in other asset classes. At some point, many US stocks will be priced well below their long-term value. We may be at that point now, but I'm not going to say that for sure.
Interest rates: This is a very major story which has been overshadowed by the action in stocks. The 10-year US Treasury rate is now at 3.66%, incredibly low. It feels like I've been calling this rate incredibly low for nearly a year now, since it was around 4.80%.
That tells you that global investors have increased their desire to lend money to the US government. It means that, on a risk-adjusted basis, there is a shortage of good investment opportunities, in turn portending lower growth overall. It also tells you that fears of inflation are slim to none.
Now you're entirely free to believe otherwise, and many fiscal conservatives do, particularly when presenting the case against deficit spending.
My heart is with you fiscal conservatives, right down the line. My head looks at the numbers, and says otherwise. As long as money is so darned cheap, we should be borrowing barrels and barrels of it, and cutting taxes just as much or more.
And I'll reverse my position on this issue the very nanosecond that long-term rates start going up.
"All right, blackhedd, you smarty-pants. It's one thing to lend to the government. That's just risk-averse behavior. What about business lending?"
Look at near-term LIBOR. Everyone's panties have been in a knot in recent months as the LIBOR spread over benchmark risk-free rates has hovered near 100 basis points, indicating a severe credit crunch. LIBOR has fallen nearly 100 BPs in the last month. The credit crunch is easing. This is probably due to very aggressive countermeasures by the European Central Bank.
It's also possibly a faint signal that we've turned the corner on mortgage-asset related losses. You heard it here first.
Commodities: Crude oil is down more than 10% in less than two weeks. We saw exactly the same thing happen a year ago January. I don't have the data to tell you whether the Saudis quietly increased production back in November as they obliquely hinted they would. (It takes five weeks or so, including a 30-day ocean voyage in tankers, for such moves to impact world prices.)
The news stories are saying that crude prices are falling because the expectation of a weaker US economy will reduce demand. I think there's a lot of convincing evidence that high prices have curbed demand for gasoline, somewhat less for distillates (diesel, heating oil, jet fuel).
But crude oil is different. As you've heard me say, oil is used by speculators as a hedge against dollar weakness. I believe the crude price on any given day inversely correlates pretty well with sentiment on the dollar.
And the dollar has weakened against the yen (and the Chinese yuan), and strengthened against the euro. What does all that mean?
The yen action is volatile, since it tracks daily carry-trade activity, and so is largely sentiment-driven. The euro is falling because of expectations that the ECB will throw in the towel and start cutting rates. The yuan is rising because the Chinese have finally managed to start slowing down their economy.
Agriculture: Prices for corn and wheat continue very, very strong. Day-to-day, they depend on the weather reports. Longer-term, they respond to anticipated demand from the developing world.
Corn is a crop that produces relatively high financial yields in the US, compared to the other big crops, like several kinds of wheat, soy and sorghum. Corn acreage will grow. But not in response to demand for ethanol production, which is likely to fall in 2008.
Why? Simple. Ethanol is used primarily as motor fuel, a market in which demand is softening.
So that's the roundup. You'll note the extremely rapid changes in much of what I've discussed. That speaks to the unsettled and uncertain nature of the global economic outlook. All of this analysis could be right out the window before the end of the day.
Do you still think stimulating the economy is a good idea?
----------------
*Aside to you economic purists: I use the perhaps pejorative word "dogma" to refer to a well-established line of reasoning that has earned several Nobel Prizes, by way of pointing out that modern portfolio theory almost certainly has very deep, systematic flaws.
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the unsecured rate for funds from London Bank. Can't rememeber the exact wording to get "LIBOR".
It's somewhat analogous to "Fed funds," which are deposits that US banks are required to hold at the Federal Reserve. Banks can and do lend these funds to each other on an overnight basis.
Asthey fall, borrowers get a reduction in interest expense. This is immediate relief, as opposed to government "stimulus".
The price of gas in New Jersey is over $3.00/gallon. While I'm not an economist, this is the single most overriding factor affecting my checkbook and, therefore, the economy. Am I to naiive to suggest two simple things the government can do to improve our economy both in the short and long haul:
1. President Bush can issue an executive order killing all earmarks in this year's omnibus spending bill and use the funds to issue a tax refund to all Americans which will, in the short term, inject much needed cash into the economy.
2. Issue orders to begin drilling oil in ANWR, and wherever else we can find it. We will be increasing the supply of oil into the market and we all know what happens when supply exceeds demand.
The wholesale price of gasoline on futures markets is maybe $2.29 or so. (The difference between that and what you pay is mostly taxes.)
When crude oil was below $50/barrel not much more than a year ago, gasoline wasn't priced at $1.14.
You see where I'm going with this? Crude oil on a percentage basis has risen far more than prices for refined products.
That suggests that the market (by reducing demand) is already doing what you're asking the government to do.
Does that mean I think your suggestions are not good ideas? Not in the least. I just don't think it's ever a good idea to hope the government will ever do anything good.
that the government cannot be put in check and be held responsible to We the People. If God only requires one tenth of my income, why should the government require more?
However, politics is one thing and business forecasting is another.
I want to believe you, and the political side of me will do so as long as possible.
The business side of me is saying: hedge your exposure to the US government. Of all the governments in the world, ours is the only one that is going backwards, in terms of doing what is good for prosperity.
Everyone else (including RedState's favorite economic punching bags, France, Germany, Spain, Italy, and the UK) is waking up and smelling the coffee. Japan is standing still at a pretty high level.
Look for investments in other countries. Or invest in US companies that are doing so.
I don't think a persuasive argument against a bloated government can begin with that proclamation.
Suffice to say with your first point about gas prices, I'd settle for some new refineries. To paraphrase a hero, "government needs to get out of the way".
I think the point is that if the work of God Almighty only requires a 10% tithe, then the work of government should require much, much less.
Of course God doesn't NEED anything, but we do have some instructions regarding our incomes.
If the work of God Almighty only requires 10% of your income, then surely your affairs require less. So you should be donating the extra 80+% to charity.
A lot of the remaining 90% goes to the government, which was the initial point.
Anyway, I believe using my income to provide for my family is what the Good Lord would have me do - or do you disagree?
Most of the people I know in the oil business talk about our lack of capacity to refine oil, not drill for it. You might have the ability to buy 20 Aston Martins, but what are you going to do if you only have a 2 car garage (and half of it is where your wife makes you keep all of her stuff that she never throws away)?
If we're going to encourage the government to let go of its misdirection, we need to direct our efforts to refining not production capacity. ANWR isn't Beaumont, TX, which would, in my opinion, do more for the supply and price of gasoline than any amount of raw material, don't you think? Enjoyed your post tremendously.
...at least as conventionally understood: we'll get more refinery capacity in this country when pigs fly. Too many people are dead set against it, and they all vote.
A more effective way to reduce our demand for imported petroleum (more than half of which is used as motor or jet fuel) would be to sharply raise federal taxes on refined fuel. (By sharply, I mean in the neighborhood of two additional dollars a gallon.)
There, I said it. Let the wailing and gnashing of teeth begin. If there are any reasonable responses, I might explain my reasoning, or do it on a separate post.
Well, yeah, it would be effective in reducing demand. In spades, I'm sure. But would the resulting massive hit to the economy be worth it? Shipping costs on everything from lettuce to rebar would double. The US economy would go into an ice age. You're not just playing Devil's Advocate, here, are you?
Your concern is with the cost of shipping goods. Maybe you could research the total size of the domestic logistics business (start by adding FedEx and UPS, then add in the LTL and the intermodals and the railroads). That would give you a rough place to start measuring the impact on prices for goods and materials.
My expectation is that a lot of adjustments would happen rapidly, and rationally.
Another big impact is on personal transportation. There are people out there who ride their motorcycles to work, but others drive 120 miles a day. Think about the impact on suburban housing values.
Yeah, I suppose the motorcycle manufacturers would like it. At $5 a gallon, buying a hybrid wouldn't be enough. Mopeds might finally catch on.
I believe you're dead on. The day that gas prices shoot up to $5 a gallon, you're going to see all you-know-what break loose. I honestly think the people of this country would be so motivated at that point that we might actually force our elected leaders to do something about our abysmal energy policy. Instead, we are forced to endure this slow creep upwards in hopes that we just put up with it and go willy-nilly when gas prices drop below $3 a gallon.
and for the same reason. Won't get much development even on State lands on and off the Arctic Coast of Alaska if, as is expected, the Polar Bear is designated as a "threatened species" because of "global warming." I won't digress into what a load of crap this is.
At current production levels, there is enough, barely, refinery capacity on the West Coast to accept Alaska oil.
Sure, a tax that high would force fuel prices high enough to provide a real incentive to change habits. I think only having NO gas would cause the vast majority of Americans to use mass transit, even were it available more widely. Dramatically higher prices would force them to make better choices about the vehicles they drive. Mommies driving three and four ton 4WD SUVs in places where all the roads are paved and it never snows is just a damned dumb choice no matter what the price of gas. The makers hyped them because it was the only market segment where the domestic makers could make a profit and had an advantage over the imports. I drive on ice and snow six or eight months out of the year and I haven't owned one of the expensive, high-maintenance, gas guzzling pigs since the 'seventies.
Likewise, everybody and his dog doesn't have to fly everywhere all the time. There aren't a lot of people who are so important that they have to be anywhere all that quickly. Air travel just became a commodity after deregulation and is so cheap that teenagers are gold and platinum level mileage plan members. It wouldn't be a bad thing for air travel, at least at the regional level, to become more of a luxury product than a basic commodity. These days all it has over Greyhound is being a little faster, and not even that for shorter distances when you add in airport travel time and wait time.
That said, there'd be some very real economic and societal dislocations for quite some time as the Country adjusted to a new price and transportation mode paradigm. I remember the Seventies!
In Vino Veritas
manage gas taxes the way the Fed does interest rates: raise them when demand is superheating, cut them during recessionary times.
Thus, I don't think now is the time for a gas tax increase.
Drilling in ANWR or authorizing new refineries is a LOT more politically feasible than slapping an extra two dollar tax on gas.
not to the Democrat Party. They'd take their chances with a tax hike before they'd take their chances with alienating their envirowhacko friends.
In Vino Veritas
Earmarks do not allocate spending. They only direct spending that has already been allocated.
Legally, if the President voids a list of earmarks that weren't written into law, the law still allocates the same amount of money to the agencies and departments that had their money earmarked. So he can't just issue a tax refund.
Not that I'm in favor of a special tax refund as a tool for fixing the economy anyway. One off tax refunds create no new incentives except for some short term spending. In other words it's just another Keynesian trick.
As for ANWR, if we started drilling now, by the time the oil started flowing, we'd be over this rough patch anyway. Oil doesn't get going that quickly.
Oil doesn't get going that quickly. We must start NOW in order to affect the long term. We have had this problem since the 70's and I do not think we would be in the geo-political situation we are now if we had developed our own natural resources back then. This would have circumvented the funding of radical islamic states of billions (trillions?) of dollars and minimized their ability to fund state sponsors of terror.
I just think they're unsuitable as an immediate economic stimulus.
it's not an instant-turnaround venture. Infrastructure has to be built for getting the oil and then for transporting it -- and, unless something is done about refining capability in the U.S., that oil will just wait at one of our existing refineries, all of which are currently working at capacity (with very old technology).
All of that is a many-year venture.
The revenues generated from increased oil production can be used to shore up social security and make the tax cuts of 2001 and 2003 permament.
Ethanol demand is not dependent on actual economic demand for fuel. Its demand is entirely due to the fact that subsidies render it an attractive replacement for gasoline. As long as ethanol is artificially cheaper than gas and operates with less regulatory oversight (or at least people being a pain in the rear) demand will remain strong.
______________________________
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
Ethanol prices are dropping. They built too much production capacity for the stuff, and they'll have to shut some of it down.
But I would expect to see some news stories about how heartless capitalists are killing these valiant eco-trepeneurs. Maybe featuring a shot of Dick Cheney in black and the death star in the background.
______________________________
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
I think this comment is especially relevant:
"But one of our cherished free-market dogmas is that markets discount all available information.* And the markets are just as confused as anyone these days."
Add to this discounting the political uncertainty we face with the very real possibility of a Democrat House, Senate and President and you have the stampede.
I am convinced that the psychological blow of the Dems taking the House and Senate was the beginning of the end, just as I am convinced that the Republican takeover of the House and Senate in 1994 was the psychological catalyst. I wonder who will be the first Democrat to say "the recession we inherited' or "the Bush recession" will be?
It's been a hell of a good run, though.
...a Democratic sweep this fall. Same goes for businesspeople. But this was just as true twelve months ago as it is now. And a year ago January, markets were calm, quiet, with extremely low volatility, and the outlook was benign.
I think if you asked your average Wall Streeter who should be President of the United States, the average answer would be "it doesn't matter."
Do they seem to be FOR a Dem sweep or against it?
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The Dems (most of the managing directors and the top guys) are happy about it. The Rs (a few of the traders and most of the IT staff) are kind of disgusted.
The vast majority (everyone else) is just taking it like they take the weather reports: interesting but ultimately meaningless to the markets.
Amazing. I guess they like high taxes and gov't regulation/meddling? Seems to me like it should be the other way around. Take the irony of Warren Buffet for example - the money guru loves Hillary!
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I heard an interview with a top Wall Street guy not too long ago, and he was asked about this very thing. His cold reply was "We intend to make money no matter what tax regime is in place."
I guess they have some to the conclusion that politics is out of their hands and they will play the hand they are dealt.
Seems incredible to me, but probably allows them to sleep at night.
This is sad but true. The free flow of capital across borders allows investors to profit regardless of whether those profits derive in the US or elsewhere. If other countries have better growth policies, investors can just shift their capital to those countries. The sad part is that, as always, the Democrats' high-tax policies which are intended to help the poor end up hurting the poor more than anyone else.
***********************************
And statesmen at her council met
Who knew the seasons when to take
Occasion by the hand, and make
The bounds of freedom wider yet
- Tennyson, _To the Queen_
And I really believe a lot of the market activity is the discounting of this prospect.
....are doing just fine thank you.
All this talk of economic gloom and doom is just hilarious. And Mrs. Clinton's proposal(she even brought up a mayor's fund, I believe, where they would just send some payola to inner city mayors. Remember Bill's $800B "stimulus") would just exacerbate things.
I think we make a huge mistake when we allow Liberal group think to even breathe. Say no to checks in the mail.
As we discussed in another thread, a Keynesian stimulus is largely discredited by economists.
But good economics don't necessarily make good politics. The problem with good economics is they tend to take fairly narrow and aggregate measures of economic performance. There might be a case for good politics.
Let's consider the worst from an economic perspective kind of stimulus package--cash disbursements. I agree it's misleading to sell it as an economic stimulus package. However, it might help a number of people get through a rough patch--a difference between having heat or not, or making the mortgage this month or not. These are real benefits. Of course there's a cost, but there are real benefits as well if you broaden your calculation of benefits to include more than aggregate economic performance. In short, the cost benefit analysis depends on how you choose your metrics.
Finally, I think in the long run a stimulus package like this, especially if it's linked to reduction of corporate taxes is better than the federal government messing with the mortgage markets by preventing ARMs to adjust and the like.
Forget the costs, just give other people's money away now! Now! NOW! Take take take! Give give give!
I did not say forget the costs. I said that there are different metrics to use in making cost/benefit analyses than those of neo-classical economics.
...trouble heating their homes. Most of America heats with natural gas, which is far underpriced relative to crude oil these days. Those few people in the Northeast who use heating oil (myself included) are complaining loudly about the price, but I don't see anyone cutting back any. And the weather, which controls the price as much as anything, hasn't been that bad.
Similarly, I've seen not the slightest evidence that people are having trouble paying their mortgages, except for people that bought too much house in the first place. This distress is a result of over-reaching, not deeper economic problems.
But you give the game away when you say that good economics is not the same as good politics. Exactly so. And as long as the problem you're trying to solve is a political one rather than an economic one, how about proposing some political solutions?
In all candor, the cost to the economy of borrowing and spending $100 billion in a stimulus package is probably negligible. It won't do any good, either, of course. And the political benefit is palpable.
If the economy gets better, the politicians will take credit for it, like the weatherman taking credit for sunshine. If it gets worse instead, everyone will just blame it on the Republicans.
that the price of gasoline or heating their home makes any real difference, they're either very young or have much bigger problems than just some economic downturn. The only exceptions to that I can think of is someone who has a very long commute or who has to drive a lot for their job, but in the latter case, they can usually pass on the cost.
I filled up my pickup yesterday at $3.58/gal. or $60 and change. That will last me a week or so. The Chrysler is cheaper to operate but I don't like to drive it in the Winter; I don't much care if some fool hits me in the beater pickup. Anyway, $60 isn't going to make much difference in my life.
The one place where high fuel prices are changing people's habits is with boats. Beginning last summer, there was noticeably less recreational boat traffic and the cost is all the buzz on all the boating boards. But, then you're talking about a pure luxury activity; nobody NEEDS a recreational boat. It hasn't stopped me from using mine - weather largely has lately though, but you make sure you really want to go when it costs $500-$600 to fill it up and you can easily use that much in a day.
In Vino Veritas
Someone who gets laid off in this economy is going to find another job, but it might take a couple of months. In the meantime, the rebate helps ease some of the pain that goes with a job hunt. That's why I wouldn't evaluate the policy purely in terms of its economics. It's not really an economic stimulus, it's more like taking pain medication--it doesn't do anything for the underlying symptoms, but it still provides some relief.
And it probably is a good time to buy a used boat. SO, maybe the stimuli will help increase demand a little there too.
The economy is still adding jobs on a net basis. Manufacturers are laying people off like crazy, but retail, healthcare and government are hiring.
Largely because of the slowdown in new housing construction--so I assume it's happening elsewhere. (One plant makes plywood, the other aluminum bathroom fixtures.) Again, they will likely find other jobs. But it may take some time, and for some, it may involve relocation, as these factories are in rural areas.
If there were no economic pain at all, I doubt you'd see as much call for a stimulus plan.
Anyway, we mostly agree as to the facts of the case, the difference is one of perspective.
And it was quite a surprise, too.
There is growing apprehension on the street, especially the younger MBA's who aren't as resigned to these things.
Maybe, a big maybe, good politics can produce good economics, but I doubt it. Much of a "recession" is about consumer confidence and confident consumer spending. IF, big IF, a "stimulus package" were sold as a solution to a rough patch and acted to instil confidence, it might well get the economy through the "recession" by increasing consumer spending purely on psychological factors. That said, neither Party, and especially the Ds, would never go along with any package being the right package. The Ds and their media running dogs have talked down one of the best economies in our post-Oil Embargo history purely for political advantage. It is more important to them to be in power than to have a good economy or to win wars, or even to defend the Country.
In Vino Veritas
LIBOR has fallen nearly 100 BPs in the last month. The credit crunch is easing. This is probably due to very aggressive countermeasures by the European Central Bank.
The only measure I recall them taking was a $500bil injection in mid-to-late December, which I'm sure was helpful, but have they taken any other measures? I perceived the news to be the ECB's failure to take action, handicapped by inflation fears.
************************************
And statesmen at her council met
Who knew the seasons when to take
Occasion by the hand, and make
The bounds of freedom wider yet
- Tennyson, _To the Queen_
...with open-market operations to bolster credit formation in Europe. It's finally starting to work (knock on wood).
They've done a lot more than the Fed. But the problems in Europe were much bigger in the first place.
Thanks. Where do you find your information on the ECB and BOE actions? All that I recall reading about in the WSJ per these banks is the interest rate.
************************************
And statesmen at her council met
Who knew the seasons when to take
Occasion by the hand, and make
The bounds of freedom wider yet
- Tennyson, _To the Queen_
Let's face it; Congress seems to know nothing when it comes to economics (and, if you thought they did, Congresswoman Kaptur more than adequately proved my point yesterday). If the credit crisis really is turning the corner, and the stimulus goes through, the lag on such a fiscal policy could end up potentially overheating the economy. And yet this hasn't even crossed the minds of anyone in Congress. Not only are we all Keynesians now, we're apparently dumb Keynesians at that.
All this talk of one-off rebates and credits... what about something that allows for greater wealth creation in the long run? What about a lower corporate tax rate (after all, ours is higher than that of France or Germany... or pretty much anywhere else in the world, for that matter)? Not on the docket. Even making the Bush tax cuts permanent is a non-starter. You reap what you sow, and electing a Democrat to office results in the same sort of end result to your wallet as what would happen if you were mugged. The difference is at least the mugger confronts you directly about it. Why is spending in the short term okay, but long-term opportunity forbidden?
Finally, on a more amusing note, in an interview with CNBC, Nancy Pelosi talked about how "small incentives" for business were part of her "innovation agenda". Is it just me, or did she sound like those God-awful IBM commercials?
"No matter how much lipstick you put on the taxation pig, it's still a pig... and it's currently snout-down in your wallet." - Michael Fisk
We had far looser monetary policy through 2003 to address a much less serious economic situation. You can argue that the extra liquidity just inflated asset prices, and I think that's partly true.
We're not going to get an overheated economy, with capacity underutilization, deteriorating credit quality and all that stuff. Mostly because no one is investing much in the US to begin with. That's a secular effect, not a cyclical one.
I don't think the credit crisis is even close to over. Analysts thought when Pandit and Thain took over at Citi and Merrill, respectively, they would write-down everything but the kitchen sink - but the write-downs keep coming, which leads me to believe either (a) the problems are FAR worse than the markets anticipated, or (b) they keep getting bad news. (Pandit's disastrous call this week means (b) might actually be the case).
jxhusa,
The banks are running out of securities to write down. Merrill's exposure to ABS CDO's dropped to just $4.8Bil from $15.9Bil last quarter. Citi is in a much worse condition, however, as they still have $29.3Bil of subprime CDO exposure.
These two banks--Merrill and Citi--accounted for 40% of the massive write downs over the last six months. I think we can consider Merrill mostly done with the large write-downs. UBS, Lehman, Morgan Stanley, et al, may have some write-downs left, but not nearly on the scale of what we have seen in the last two quarters. IMO, the worst of the credit crisis is over.
However, if we are in/slip into a recession, the banks are not out of the woods yet. Their earnings hits have derived almost exclusively from subprime write downs and many of them have upheld solid revenue figures. In other words, they have not yet felt the impact of an economic slowdown. While blockbuster M&A deals have slowed substantially, middle market M&A has held strong and upheld bank revenue. Should our economy continue faltering, I would anticipate these middle market deals to slow. Combined with drastically slower LBO activity, banks will see a whole new set of problems. In addition, a Sanford Bernstein analyst estimates that $160Bil of deal debt is sitting on banks' balance sheets unsold, tying up capital which has become far more precious.
There is an argument that even in a recession, M&A business may not weaken as substantially as in a normal recession (if there is such a thing). P/E firms drove up the valuations for M&A deals, making acquisitions too expensive for some corporations. Now that the P/E firms cannot access plentiful cheap debt, corporations with strong balance sheets that were previously kept out of the game have watched the value of their potential targets decrease in value and might start undertaking strategic transactions. I don't really know enough to gauge the degree of impact this may have on M&A business. Blackhedd probably knows better than I do; it's possible if corporations expect slower growth to last longer than a couple quarters, they hold off on any acquisitions until a recovery is near.
**********************************
And statesmen at her council met
Who knew the seasons when to take
Occasion by the hand, and make
The bounds of freedom wider yet
- Tennyson, _To the Queen_
I'm certainly no economistbut compared to where we were 5 yrs. ago, I'm not worried (yet).
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2003 was at the tail end of the dot-com crash, when the markets were way undervalued, so a five year chart is a bit misleading. Certainly last year the pendulum had swung the other way, but people I know are pretty pessimistic about this year's outlook. Especially if Asia, which has generally continued to go gangbusters, also slips (and it looks like its headed that way).
Drudge, et. al. are reporting a possible up to $800 per taxpayer stimulus.
I loved the Bush tax cuts, don't get me wrong. My very middle class family benefited big time and it's allowed us to purchase some big ticket items we couldn't have afforded otherwise...529 plans for the kids, braces on their teeth, later model cars, etc. We will certainly appreciate a little more help coming.
However...I have the sneaking suspicion that this will all catch up to us if and when a Dem is elected POTUS. Won't they turn the tables and enact "tax fairness payouts" to welfare types who don't pay taxes in the first place? And won't they pay for it by repealing the tax cuts and child tax credits?
Furthermore, isn't our government broke? The trade deficit is huge and our credit rating is slipping. If there are huge payouts, won't that make it worse?
Help me figure out why this is a good thing. It would be great for my family, but I am leery about its impact on our nation. Thanks.
"Be intolerant. Because some things are just stupid"
- Ryan Dobson
Had been up most of the morning, then took a nosedive.
Of course this plan isn't going to do the economy any lasting good. And of course, the stock market probably is down because everyone wants to get flat going into a long weekend.
Who knows, an asteroid might hit the earth before Wall St. opens again on Tuesday.
Who knows, an asteroid might hit the earth before Wall St. opens again on Tuesday.
And the NYTimes will report that women and minorities were hardest hit.
Aaaaaaarrrrrrrrrrrrggggggggghhhhhhhhh!!!!!!
Sorry about that, all. Please don't ban me.
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Diplomacy is the art of saying 'Nice doggie' until you can find a rock.
Is the government broke? It's hard to say that an entity that prints its own money is ever broke. :-)
The trade deficit is falling. Rather sharply in fact. Was $7 trillion in 2006, closer to $5.5 trillion now.
The US Government's credit rating is better than ever. That's the meaning of the low long-term interest rates. Go figure.
Blackhedd, I don't particularly look forward to disagreeing with you. But here goes:
The US Government's credit rating is better than ever. That's the meaning of the low long-term interest rates. Go figure.
The FT reported last Friday that Moody's warned that the US is at risk of losing its AAA credit rating within a decade unless it takes "radical action to curb soaring healthcare and social security spending." Do you think the Treasury rally is because of a stronger credit rating, or traders' standard flight to safety in an economic downturn?
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And statesmen at her council met
Who knew the seasons when to take
Occasion by the hand, and make
The bounds of freedom wider yet
- Tennyson, _To the Queen_
Again Blackhedd has positively educated me in the financial area. Thank you.
I want to relate a situation that points to the bigger problem we have in America.
I have a friend who is a janitor at a school. His wife works full-time. Between them, they probably don't clear more than $75,000 a year, most likely less.
Several years ago he bought a $250,000 house in Colorado. His first mortgage is a no principle ARM for most of the house. He got a second loan for a down payment.
His ARM went up this year. His home value dropped $30,000 and he cannot get another mortgage until he finds out how to pay for the $30,000 he never had in the first place.
What was he thinking? What was the mortgage broker thinking? Both need to learn a hefty lesson from this stupidity. Because our government is so willing to bail everyone out, people don't learn from their mistakes.
I work hard to stay within my financial means. My church and I will make sure he has a roof over his head and food to eat. When the government bails people out, they tend to think they did nothing wrong. That's the worst thing that could happen.
I don't know and wanted to ask the question. I would assume that the government is envolved somehow.
I agree with what you said these types of loans should never have been made in the first place by the lenders.
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Conservatism is about empowering people to do the work, not the government!
Florida went insane with real estate investment and overbuilt, now speculators in condos in Miami are losing some of the "money" they never had because the bubble burst. No candidate on the GOP side should promise anything to help that situation.
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incentive, possible a tax cut, that would allow them to give their employees a pay raise to account for inflation.
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Conservatism is about empowering people to do the work, not the government!
I respectfully suggest you are all missing the most serious risk to US economy and financial system at present.
That is the potential breakdown of the counterparty system of maintaining and settling transactions.
The WSJ today had a piece, http://online.wsj.com/article/SB120061980722699349.html?mod=hps_us_pageo..., on this very subject.
Putting it all in context, losses from all forms of mortgage delinquencies and foreclosures are variously expected to cost investors/lenders between $500 billion and $1 trillion in this cycle.
However there are at present almost $600 trillion of over-the-counter derivatives contracts out there. There are contracts in which the other side to the trade is a known or even unknown party which may or may not perform. The scale of losses could grow unimaginably large.
Because of the downgrades and possible failures of one or more monoline insurers, this is a far from theoretical problem.
Blackhedd, you are amazing. Thanks for the free economics lesson!
VA Voter;
Blackhedd, Can you (will you) point me to a write up of the structural flaws you referenced?
Thanks,
What on earth is LIBOR? I liked your post, but I don't understand why people use acronyms with explanation unless those acronyms are as obvious as, say, GOP.