Monday, March 31, 2008

Mortgage Bailout

A government bailout of the housing market is both fiscally and morally irresponsible; it is an unfair subsidy being paid to the wealthy (bankers), the greedy (mortgage brokers, flippers, and yes some homeowners), and the incautious (some homeowners), with no benefit to those paying the bill (taypayers).

Why should responsible Americans be forced to pay for the mistakes of others?

from: Stop the Mortgage Bailout

Housing Bubble

April 1st we will be at #16 on the chart. In other words the end is about 4 years away.

More info here: The Data Does Not Lie

Recession Probability

based on the 4 monthly variables used by the NBER to determine U.S. recessions: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales.
great chart from Carpe Diem

So, no recession. This model seems to have great predictive power based on the second chart.

Thursday, March 27, 2008

Cartoon: Social Security

Cartoon: Trade-offs and Opportunity Costs

1913 Income Taxes

From its beginnings in 1913, the income tax system was designed to be progressive; the more you make, the more you pay. The top bracket then was 7%, and it applied only to those who earned above $500,000 a year, which is about $10.6 million in today's dollars. Congress also recognized that some were too poor to pay taxes, so it exempted the first $3,000 in income. In 1913 that exclusion liberated all but 1% of the population from taxes.

from CNN

Accounting for inflation, the first $65,000 would need to be exempted.

Tax Freedom Day: April 23

from the Tax Foundation

The Wealthy are Paying More

"Under the 2001 and 2003 tax cuts, the data show that the tax shares of the top 1% increased between 2000 and 2005 to historically high levels," ranking member Jim Saxton of the Joint Economic Committee said today. "Despite the contention that the tax cuts would unfairly reduce the tax burden of the rich, their share of taxes has in fact gone up," Saxton concluded.

from Carpe Diem

Historic Marginal Tax Rates

Wednesday, March 26, 2008

Cartoon: Substitute Goods

The Lost Decade

The stock market is trading right where it was nine years ago. Stocks, long touted as the best investment for the long term, have been one of the worst investments over the nine-year period, trounced even by lowly Treasury bonds.

The Standard & Poor's 500-stock index, the basis for about half of the $1 trillion invested in U.S. index funds, finished at 1352.99 on Tuesday, below the 1362.80 it hit in April 1999. When dividends and inflation are factored into returns, the S&P 500 has risen an average of just 1.3% a year over the past 10 years, well below the historical norm, according to Morningstar Inc. For the past nine years, it has fallen 0.37% a year, and for the past eight, it is off 1.4% a year. In light of the current wobbly market, some economists and market analysts worry that the era of disappointing returns may not be over.

The Lost Decade graph

Cartoon: Socialism and Environmentalism

Monday, March 24, 2008

Cartoon: Economic Stimulus Package is Insignificant

Cartoon: Enironmentalism is Socialism Repackaged

Cartoon: Mugabe and Economic Disaster

Proof that government central planning can't create prosperity, only catastrophe.

Atlanta Tornado

Most Profitable NCAA Tournament Teams

According to figures filed with the Department of Education by each school, North Carolina's men's basketball program had revenue of $17.2 million during the 2006-07 school year, second only to the University of Louisville's $23.2 million among the 65 in this year's tournament. North Carolina's profit of $11.6 million is behind only Louisville's and Arizona's.

By comparison, the Mount, as it is known to its students and faculty, essentially broke even with revenue of $876,744 from it's men's basketball program. That makes it the tenth poorest school invited to March Madness this year.

Mississippi Valley State, with revenue of $233,036 had the lowest revenue from its men's program. It also lost $249,199 from its men's basketball program, is the poorest.

read the CNN article

Gas Prices at All-Time High

Gas prices surged nearly 7 cents over the past two weeks to reach an all-time inflation-adjusted high of $3.26 per gallon of self-serve regular, a national survey said Sunday.

The previous inflation-adjusted record occurred last May 18, when the price was $3.24 in current dollars.

The Lundberg Survey, carried out Friday, tallied prices at about 5,000 gas stations.
Despite the record price, seasonal demand is growing, said Publisher Trilby Lundberg.

read the CNN story

Sunday, March 23, 2008

How Different Investments Did Last Week

Big Green Egg

Here we see what appears to be minor damage done to the shipping container.

Here is the damage done to the mesh door of the grate. Notice the chip 3/4 across the bottom of the opening.

Here is the other chip and the damage to the draft door.

Here is the chip and the bent mesh door.

The damage was done the fork of a forklift. The damage may have occurred at the factory or the dealer.

Naturally the damage was not noticed until the BGE was unpacked and placed on my deck.

Judging by reputation the dealer and BGE should make the situation right.

This ordeal will likely delay my first steak off of the EGG.

Updates will follow:

Friday, March 21, 2008

Great Analysis on Bear Stearns

There is a meme going around about the death of Bear Stearns (BSC). According to some people (mostly current and ex-employees) the collapse of the fifth largest investment bank in the US is the fault of many people, none of whom happen to be the management of Bear Stearns itself...

The bottom line is that Bear went under because of the poor judgment of their management: their aggressive risk taking, their positions in the mortgage back market, their apparent lack of risk controls, their leverage, lack of liquidity and reserves, and the enemies they made over the years. Sorry to be so blunt, but get real: It was nobody's fault but their own.

from The Big Picture

Wednesday, March 19, 2008

Cartoon: Recession and Inflation

Bear Stearns Cartoons

Origins of the Housing Crisis

Bernanke Effect

The Fed cut its short-term interest-rate target 0.75 percentage point to 2.25%, not the full point that markets had been expecting. It was the largest disappointment the Fed has delivered to markets since the central bank began cutting rates in September. the move was also a signal that because of the Fed's concerns about inflation, it expects its other initiatives to bear more of the burden of stimulating growth...

Recognizing that, the Fed signaled in its end-of-meeting statement that the prospect of more rate cuts remains on the table. "The outlook...has weakened further," it said. "Consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth." It said "downside risks to growth remain," and the Fed will "act in a timely manner as needed."

Nonetheless, the Fed has increasingly come to the view that lower rates alone won't restore order to the financial markets and prevent a severe recession. It has rolled out ever more creative and aggressive attempts to infuse cash into market corners where it normally doesn't operate, culminating in Sunday's decision to lend to investment banks from its "discount window," a privilege previously reserved for commercial banks. Chairman Ben Bernanke also has publicly backed action to use public money to stem a tide of mortgage defaults and foreclosures.

Highlighting the depth of the Fed's inflation concerns, two of the 10 voting members of the policy-setting Federal Open Market Committee voted against the 3/4-point cut. Charles Plosser and Richard Fisher, presidents of the Federal Reserve Banks of Philadelphia and Dallas, "preferred less aggressive action at this meeting," the Fed said.

from the WSJ

Gas Prices

Crude currently trades around $110 a barrel, but breaking down the money in that barrel of oil is tough. Exploration and production costs, royalty payments - all a big part of $110 a barrel oil - vary widely country by country and project by project.

"It's difficult to generalize; there's a whole spectrum of costs," said Ron Planting, an economist with the American Petroleum Institute, an industry trade group.

They can range from $1 a barrel to produce crude in Saudi Arabia to over $70 a barrel to find, develop and pump oil in the deep water Gulf of Mexico or off the coast of Algeria, said Ann-Louise Hittle, an oil analyst with the energy consultants Wood Mackenzie.

EIA estimates it costs U.S. oil companies an average of about $24 a barrel to find, develop and produce oil worldwide, but that doesn't include costs like transportation, administration, or income taxes - which can be substantial. While Exxon made $40 billion in 2007, a 60% increase from 2004, it paid $100 billion in taxes and royalties.

read the article

The Most Expensive Real Estate Listing in Georgia

Le Reve, a 90-acre estate on Trammel Road near Cumming, is for sale for a cool $45 million...the 82-room, 47,000-square-foot home...

Designed by Atlanta architect Norman Askins, the four-floor mansion features a 28-foot foyer, two elevators, a 12-car garage, stables, a home theater modeled after the Fabulous Fox in downtown Atlanta, 17 bathrooms, 62 televisions, 300 miles of high-tech wiring and a collection of antiques, furnishings and custom paintings assembled by Norma Humphrey with her three-decorator team.

Le Reve's 18-hole private golf course was added in 2005.

read the article

Frank Shostak on the Current Economic Situation

The Fed's New Tricks Are Creating Disaster
Frank Shostak

The Federal Reserve is trying a range of new tricks to push new forms of lending as a means of preventing what they fear may otherwise be a major collapse in financial markets. What all these strategies have in common is an unwillingness to come to terms with the reality that the crisis is based on real factors and can't be merely papered over without grave consequence to economic health...

Bernanke is of the view that by means of aggressive monetary policy the credit markets can be normalized. Once credit markets are brought back to normalcy, this will play an important role in preventing serious economic crisis. Remember Bernanke's financial accelerator model: a minor shock in the financial sector could result in large damage to the real economy.

In short, Bernanke, by means of his so-called "innovative" policy of fixing the symptoms of the disease, believes he can cure the disease.

What is the source of the disease and why are investment banks so heavily infected by it? The root of the problem is the Fed's very loose interest rate policy and strong monetary pumping from January 2001 to June 2004. The federal funds rate target was lowered from 6.5% to 1%. It is this that has given rise to various malinvestments, which we label here as bubble activities...

Obviously, then, if the pool of real saving is still healthy, Bernanke's policies might "work." In short, after a time lag, financial markets might start zooming ahead and the real economy will follow suit. We suggest that if this were to happen, the recovery shouldn't be attributed to Bernanke's policies but, rather, understood to have happened despite his policies.

In the alternative scenario, to which we assign a fairly high likelihood, the pool of real savings is actually falling or stagnating. In the framework of the alternative scenario, Bernanke's policies will only do further damage to the stock of savings and sound capital investment, and plunge the economy into a severe and prolonged crisis.

read the entire essay

The markets responded favorable to more rate cuts yesterday. However, the fundamentals are largely unsound. The solution to the problem is not rate cuts, which caused the current crisis.

Tuesday, March 18, 2008

Big Day on Wall Street: 420 Point Gain

Stocks jumped Tuesday, with the Dow surging 420 points, its fourth-biggest one-day point gain ever, after the Federal Reserve cut the fed funds rate by three-quarters of a percentage point, surprising investors looking for a larger cut.

The Dow Jones industrial average (INDU) rose 420 points, its biggest one-day point gain since July 2002, for a gain of 3.5%. The broader Standard & Poor's 500 (SPX) index added over 54 points, its biggest one-day point gain since Jan. 2001, for a gain of 4.2%.

The tech-fueled Nasdaq composite (COMP) advanced over 91 points, its biggest one-day point gain since May 2002, for a gain of around 4.2%.

read the CNN story

How long will these gains last?

Federal Funds Rate Cut 0.75% to 2.25%

The Federal Reserve slashed a key interest rate by three-quarters of a percentage point Tuesday, the latest in a series of moves by the central bank to try and restore confidence in the economy and battered financial markets.

The Fed cut its federal funds rate, an overnight bank lending rate, to 2.25%. It is the sixth cut in the past six months and comes at a time when the Fed is trying to keep the economy from slipping into recession - although many think it's already entered one.

Some economists have argued the rate cuts will cause a continued weakening in the value of the dollar and a further spike in commodity prices -- which could lead to higher prices for gas, food and imported goods. According to a new national CNN/Opinion Research Corp. poll released Tuesday, Americans said inflation is their top economic concern.

The Fed acknowledged in its statement that inflation pressures have grown more than expected, and it promised to monitor prices in the months ahead. But it said it still believed the greater risk to the economy was that of slowing growth, not a spike in prices.

read the CNN story

Inflation is a far bigger threat than a necessary and needed market correction.

The Costs of "Fixing" the Sub-Prime Mess

"The Fed is supposed to make sure the entire economy, and not just the credit markets, run smoothly.

But Fed chairman Ben Bernanke risks fixing the credit crunch at the expense of inflation and the retirement accounts of many hard-working consumers that didn't go out and get some exotic adjustable-rate mortgage to buy a home that cost far more than they could afford."

from CNN

Jim Rogers is right. The Fed has failed. They create moral hazard, bail-out stupidity, and "solve" problems by de-basing the currency and promoting inflation.

Inflation is the Major Concern

The Fed needs to quit chasing declining GDP growth and instead focus on curbing inflation and anchoring inflation expectations. Recent allusions to the stagflation of the 1970s are appropriate. Gold has been hitting all-time nominal highs, and oil prices have shattered the inflation-adjusted record set in 1980 during the Iranian hostage crisis. The dollar, meanwhile, is trading at all-time lows against the euro.

Consumer price inflation was 4.1% in 2007 (the highest in 17 years) while the producer price index rose 7.4%--the most since 1981. Amid these alarming trends on the inflation side, output has stalled. Real GDP grew at a meager rate of 0.6% in the last quarter of 2007, and the private sector shed 101,000 jobs in February. The beginnings of stagflation are upon us.

In response, the Fed has slashed its target rate 2.25 percentage points since September, and has engaged in all manner of novel auction schemes to bolster liquidity, particularly among those holding the bag on soured mortgages. Yet despite momentary blips upward, the stock market and the overall economy continue to slide. Even as the Fed's actions pushed many short-term interest rates below the inflation rate, fixed mortgage rates have begun rising. As inflation expectations gather steam, the Fed will find itself painted into an ever-shrinking corner...

The Fed has abandoned the one thing it can truly control--the long-run increase in price levels--in a self-defeating attempt to keep the economy growing. A good portion of the housing mess itself is the result of Fed policy: In response to the 2000-2001 recession, chairman Alan Greenspan brought the federal funds rate down to a shocking 1% by June 2003, then held it there for a full year. The rate was then steadily ratcheted back up, reaching 5.25% by June 2006...

The painful and costly recessions of the early 1980s were the result of the inflationary policies of the Fed during the 1970s. In contrast, Fed policies during the 1980s and 1990s focused on curbing inflation and maintaining price stability; this shift in focus produced both low inflation and strong, steady real growth. It would be a terrible mistake to throw out that costly victory in an effort to avoid a recession today--one that's already baked in the cake.

The Fed should commit to long-term price stability, and it needs to back up that commitment with action. Recessions will always be with us, but they will be shallow and short when the Fed keeps inflation low and evenly paced. If the Fed continues cutting rates, we will simply get the worst of both worlds: prolonged recession and excessive inflation.

read the entire article

Jim Rogers on Bear Stearns

"They are really giving up on the dollar, they are driving the dollar down, they are printing money as fast as they can. Look, the Federal Reserve has just in the last week spent 230 billion dollars taking on loans, house loans, mortgages, out of the system. This man Bernanke was never elected by anybody, I don't know where he gets the audacity to spend 230 billion dollars of our money to bail out a few friends on Wall St. This is totally outrageous.

He is next going to be in his helicopter going around the world collecting rent payments from people. Who gave him the authority to do that? To destroy the dollar, to destroy our currency, to essentially destroy the American economy? And, no one ever voted for the man. It is just mind boggling to me.

And then he gives more money to Bears Stearns so these guys can continue to drive around in their Maserati's."

New Cartoon: Sinking Dollar

Monday, March 17, 2008

Federal Deficit: February 2008

February 2008 Employment: 0.55 Million Jobs Added

great charts from the Skeptical Optimist

Falling Dollar

We are back down to 1996 value. Not horrible, but there is no end is sight.

Is Bear Stearns Net Worth Negative?

It’s just been announced that JP Morgan will buy Bear Stearns for $2 a share, implying a value of about $250 million. Given that the company headquarters is said to be worth about $1.2 billion, that gives the BS banking business a value of negative $1 billion. And that’s only after the Fed agreed to take on $30 billion worth of toxic waste from the BS portfolio, politely described as “less-liquid assets.”

from Crooked Timber

Sunday, March 16, 2008

Bear Stearns and a Market Meltdown

The next 12 to 36 hours are going to be very interesting. I will post and update frequently.

Treasuries rose after the Federal Reserve cut its discount rate by a quarter-point and traders added to bets the central bank will reduce its target for overnight lending at a meeting tomorrow.

Futures contracts on the Chicago Board of Trade show a 52 percent chance the Fed will lower its 3 percent target to 2 percent. The odds of a reduction that large were zero last week. The rest of the bets are on a cut to 2.25 percent. Fed Chairman Ben S. Bernanke is increasing efforts to keep losses in credit markets from pushing the U.S. economy into a recession.

from Bloomberg

The Nikkei Index is down 514.61 @ 11:00 AM Japanese Time

Bear Stearns

from the WSJ

Bear Stearns and the Fed

"If you bail out every investment bank that gets in trouble, that's not capitalism, that's socialism for the rich." Jim Rogers 3/12/08

Teetering on the brink of collapse from a lack of cash, New York-based Bear Stearns got emergency funding yesterday from the Federal Reserve and JPMorgan in the largest government bailout of a U.S. securities firm. The move failed to avert a crisis of confidence among Bear Stearns's customers and shareholders, who drove the stock down a record 47 percent.

After denying earlier this week that access to capital was at risk, Bear Stearns Chief Executive Officer Alan Schwartz said yesterday the company's cash position had ``significantly deteriorated'' in the past 24 hours. The Fed agreed to provide financing through JPMorgan for up to 28 days, the bank said in a statement yesterday...

The Fed is taking on the credit risk from collateral supplied by Bear Stearns, which approached the central bank for emergency funds, Fed staff officials said yesterday.

The Fed, under Chairman Ben S. Bernanke, voted unanimously to lend the funds through JPMorgan because it would be operationally simpler than a direct loan to Bear Stearns, the staff said on condition of anonymity. The regulator invoked a little-used law that allows it to make loans to corporations and private partnerships, which required a Board vote, according to the staffers.

The Fed said it was "monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system.''

Bloomberg 3/15/08

In an extraordinary move, the Federal Reserve and J.P. Morgan Chase & Co. stepped in to keep Bear afloat following a severe cash crunch.

The maneuver signaled that the Fed was trying to move aggressively to prevent Bear's crisis from spreading to the broader economy. But it seemed to do little to soothe fears. Bear's shares fell 47% to a nine-year low of $30 in New York Stock Exchange composite trading at 4 p.m. The Bear crisis, coming on the heels of this week's implosion of a publicly held affiliate of Carlyle Group, further rattled Wall Street. The Dow Jones Industrial Average fell nearly 195 points.

The lifeline gives Bear access to cash for an initial period of 28 days. J.P. Morgan will borrow the money from the Fed and relend it to Bear. Exact terms weren't disclosed, but the amount is limited only by how much collateral Bear can provide, Fed officials said.

The Fed, not J.P. Morgan, is bearing the risk of the loan. It is the first time since the Great Depression that the Fed has lent in this fashion to any entity other than a bank...

After initial relief, credit markets have taken a turn for the worse in recent weeks, breeding an every-man-for-himself attitude among Wall Street firms. With each firm intricately intertwined with others in a maze of loans, credit lines, derivatives and swaps, the Fed and Treasury agreed that letting Bear Stearns collapse quickly was a risk not worth taking, because the consequences were simply unknowable.

from the WSJ

This could signal a major collapse. Consumer confidence will drop, the dollar will fall, oil will increase, Bernanke and the boys will be exposed as incompetent. This is likely the trigger event for a major recession.

Or I could be wrong.

Economic Crisis

The U.S. Federal Reserve Sunday cut the Fed's discount rate by a quarter point to 3.25% and announced a new lending facility designed "to improve the ability of primary dealers to provide financing to participants in securitization markets."

The interest charged in this lending facility will be at the discount rate, according to a statement from the Fed. The discount rate cut means it will only be a quarter point over the fed-funds rate of 3%.

The Fed also is broadening the type of debt it will accept as collateral in the lending facility. The Fed said such loans can be collateralized by a broad range of investment-grade debt securities.

The Fed said it took the measures "to bolster market liquidity and promote orderly market functioning," according to a statement.

The facility will begin on Monday -- and the maximum period for such loans will be extended to 90 days from 30 days.

The Fed also said in its statement that it approved the recently-announced financing arrangement announced by J.P. Morgan and Bear Stearns Cos.

from the WSJ

Ben Bernanke and the boys at the Fed are in full panic mode. Bear Stearns, a major investment bank on Wall Street, lost 47% value Friday and was purchased at $2/share Sunday. The Fed cuts rate 0.25%, ahead of a meeting on 3/18. People were predicting 0.50% to 0.75% cut. That will still happen. The dollar could see a major drop coupled with a huge increase in oil.

JP Morgan to buy Bear Stearns

J.P. Morgan Chase agreed to buy Bear Stearns for $2 a share in a stock-swap transaction, people familiar with the matter say. J.P. Morgan will exchange 0.05473 shares of its common stock per one share of Bear Stearns stock. Both boards have approved the transaction.

Indeed, the Fed is taking the extraordinary step of providing special financing in connection with this transaction. The Fed has agreed to fund up to $30 billion of Bear Stearns' less liquid assets.

The deal values Bear Stearns at just $236 million, based on the number of Bear shares outstanding as of Feb. 16. At the end of Friday, Bear's stock-market value was about $3.54 billion.

from the WSJ

New Product: Pepsi Raw

read the article

Currently only available in England. I would like to see the switch to cane sugar sweetened soft drinks. End the embargo on Cuba and buy their sugar. Sugar tastes better than high fructose corn sryup.

Manufacturing Productivity

great chart from Carpe Diem

Over 4 times increase in output, due to productivity gains.

How Different Investments Did Last Week