Archive for April, 2009

Losing Their Heads

Tuesday, April 21st, 2009

Once referred to as Masters of the Universe, we now watch as the CEOs of major banking institutions are paraded before Congressional tribunals and pilloried.  Mobs cry out for their termination.  We see the chiefs of erstwhile insurance and mortgage giants held up as symbols of greed and incompetence.  The leaders of our once dominant automobile industry are called to Washington for questioning.  General Motors loses its head, Rick Wagoner, to an apparent caprice of a small group within the Executive branch.  Populist uprisings seemingly arise  spontaneously around our nation, protesting the current economic thrust being taken by Bernake’s Federal Reserve in collusion with Tim Geithner’s Treasury.  Congressional leaders, ever sensitive to shifting winds, begin pointing fingers and deflecting blame, but they had best tread carefully.  Barney Frank, Nancy Pelosi, Chris Dodd, and Harry Reed may jointly play Robespierre today, but could they in turn face Madame Guillotine for their own sins tomorrow?

Stock Waves

Monday, April 20th, 2009

Inventory, the amount of stuff you have on the shelves ready to be sold or turned into something salable, is a two-edged sword.  It represents capital that has been tied up.  The longer your merchandise sits around, the longer you must forgo using the money you spent putting it there for other purposes.  Inventory drags down profits.  But inventory also represents someone’s productive efforts and is counted as an asset.  On a national basis it is one component used to figure our GDP and is considered a plus as it grows.  Economists measure how long it would take to reduce your entire stock at the current pace of sales with an inventory-to-sales ratio.  For the nation this ratio began to soar in the middle of last year as the consumer seemed to go on strike.  Recently the ratio has begun to decline slightly even as sales have resumed their slide.  This means vendors at various levels both wholesale and retail are reluctant to replenish their own supplies even as scarce sales reduce what they carry.  When the economy perks up this will change rapidly, resulting in a huge burst of productivity.  Until then it means lower production which leads to higher unemployment which leads to lower sales which leads to lower production.  Such a negative feedback loop is hard to stop.

Banks On a Treadmill

Friday, April 17th, 2009

Conjectures run rampant: how will the banks fare when Geithner’s stress tests are completed?  What is a stress test?  Do they have all the CEOs hooked up to EKGs?  The current version is actually being applied to 19 of our biggest banks.  Economic models have been developed to see how these firms would look after two years if the economy continues to slow, layoffs continue to climb, and home prices continue to fall.  Actually, there are a couple of different tests.  One uses a set of bad projections about the future of these three variables and the other uses a set of horrible projections.  The results are meant to guide us toward a restoration of financial stability within the markets and thereby bolster everyone’s confidence.  Sorta weird.  We all know who’s in trouble and by how much.  Individual companies have been running such tests on themselves and each other for some time.  If the results portrays everything as peachy, they will be dismissed.  If they show which banks would likely fail, it could become a self-fulfilling prophecy.  If the results are kept secret, watch everyone panic.  Between now and the early May announcement, only one thing seems certain.  Watch for every politician who is even remotely connected to one of the banking and finance committees to begin distancing himself from the process before the shoe drops.

Bargains At The Mall

Thursday, April 16th, 2009

Despite the encouragement from government officials, shoppers don’t seem to be opening their wallets as wide as they did a year or two back.  Even with all the sales at major departments stores, only the dollar store concept appears to be capturing market share.  Are there any good deals left at the nation’s malls?  Yes, actually, the malls themselves.  Retail space may be the best buy this year as malls are currently losing stores at the fastest rate in a decade or more.  Almost 10% of the available space is vacant.  Without the rent, mall owners may not be able to service their debt.  Later this year I expect we’ll see some huge properties go into foreclosure or up for auction.  Consider the just-completed sale at auction of the Hancock tower in Boston for just under $661 million dollars.  Three years ago the sellers had paid $1.3 billion!  A haircut that expensive makes John Edwards look like a cheapskate.  We’re not talking just sub-prime property anymore.

Chopping Shopping

Wednesday, April 15th, 2009

After the attack on the New York Trade Center’s twin towers,  then President Bush exhorted all of us to go shopping.  A recent Newsweek cover depicts Uncle Sam demanding the same.  They do this because consumption has long been vital to America’s economic health, accounting for two-thirds or more of our total GDP.  Simultaneous with the demise of Wall Street and the onset of our current financial crises, shoppers seemed to start dropping en masse.  October, November, and December saw huge declines in retail sales, even after excluding the volatile automobile component.  Then suddenly there was a January surge.  Was it something lasting or just a reaction to bargains after a dismal Christmas season?  February showed an increase too, albeit less than January’s jump.  When the data for March was released yesterday, both of those figures were revised upward.  Unfortunately, sales in March fell back into the negative column.  We are left to wonder if the increases we saw early this year were indeed just an aberration in a more sinister trend.  We’ll need several more months of data before the answer can be known, but if it was just a temporary blip, then so was the stock market rally it engendered.

$1,000,000 of Confetti.

Tuesday, April 14th, 2009

Most of the folks I talk to or hear from believe the current path the Fed is pursuing will inevitably lead to inflation.  Historically they have a point.  I know of no other time when so much fiat currency was produced in such a short period that didn’t result in serious, even devastating, inflation.  But what if we printed all this money and burned it?  What if we shredded it and turned it into bags of confetti?  That wouldn’t be inflationary.  The Fed is trying to stave off a deflationary episode, a depression.  Depressions destroy capital faster than it can be created.  The Fed’s response is to keep printing enough so we end up sorta even after all is said and done and the economy returns to normal.  Will it work?  We’ll see, but I think Bernanke’s apparent complacency about any incipient inflation finds its ground in this cycle of  asset devaluation and the apparent destruction of capital we seem to be witnessing today.

Don’t Watch the Wall

Monday, April 13th, 2009

When your car starts to fishtail, you may have been taught to turn your wheel in the direction of the skid.  While counter intuitive, this maneuver lets the tires regain traction, thereby allowing you to resume a proper course.  When you’re skidding toward a wall, race car drivers warn not to watch the wall but keep your eyes on the road ahead.  You’ll tend to hit what you focus on they say.  The U.S. economy has a tremendous amount of horsepower and few would argue that we seem to be skidding toward a nasty crash.  How are the drivers steering?  Some would argue Bernanke and Geithner are trying to solve a crisis caused by too much leverage by using leverage.  That seems akin to turning into the direction of the skid.  Will we hit the wall or, in this case, experience severe inflation?  They don’t think so.  They are looking down the road and feel our economy can correct itself, can head in the right direction, once it regains some traction and consumers resume their spending.  We can all hope they’ll be right.