Deflation was here, no matter what Henry Paulson has done. When you lose half the value of the equity market in 12 months, people were not going to have the resources to spend on things. The lost value, the downward spiral, was here. It was why GM and Ford were looking for money, “bridge loans.” It was why the prices of gasoline has dropped by sixty percent. Gasoline had to be the best every day barometer of deflation. Home values had to drop. Gross domestic product growth actually went negative in the third quarter. People were not going to spend like they had over the last 20 years. If 70% of the economy was based on consumers spending, well those sectors were in trouble. I see the deflationary trend to occur slowly and continue for more than the next 12 months. And those money managers on Wall Street who had cash seemed to want to buy stocks. Some people on Wall Street see this as only a market correction.
Bill Gross defined equity valuation in a column released this week as “that mysterious fragile flower where price is part perception, part valuation, and part hope or lack thereof.”
In September 2008, a news story was released that 30% of the economist did not think we were in a recession. This week we learned that the recession officially had started in December 2007. It did give pause to those paying economists why they were not the first people cut in employee lay-offs. I compare these economists to those market managers who seemed to breathe the financial air of other money managers with huge egos and, as we learned with smoking, second hand breathing was hazardous to everyone’s health.
A Reader’s Digest for the weekend:
Bond yields up: Treasury prices declined, with benchmark 10-year note yields rising 16 basis points to 2.72%, near lows not seen since the 1950s.
December 5, 2008…..NEW YORK (Reuters) – Mohamed El-Erian, the chief executive of bond giant Pacific Investment Management Co., or Pimco, said the 533,000 drop in U.S. non-farm payrolls in November points to a contraction of gross domestic product of 4 or 5 percent in the fourth quarter. “A very sharp drop in the GDP growth rate to negative 4 or 5 percent for this quarter is now definitely in the cards,” El-Erian told Reuters on Friday. El-Erian helps oversee $830 billion in assets at Pimco.
Bill Gross, noted bond guru at Pacific Investment Management Co., said because of Federal Reserve steps to inject massive liquidity into the banking system and bolster parts of the fixed income markets, Treasury yields will be much lower than previously expected for the next several years. Gross said on Tuesday when viewed in relation to the direction the market is heading, with more regulation, lower leverage and higher taxes on the way, stocks aren’t cheap yet. “Recognize that roughly 20% of bank capital is now owned by the U.S. government and that a near proportionate share of profits will flow in that direction as well. Better to own corporate bonds than corporate stocks, but that’s a story for another Investment Outlook.” His stock market outlook is this: “Stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future.”
From Larry Elliot, economics editor, in The Guardian
“Forget all talk of soft landings. Banish from your mind the comforting thought that the credit crunch may be just a bad dream. Today’s shocking jobs data from the United States should remove the last shred of complacency from those still in denial about the potential of the current crisis to turn into the most serious economic shock to the global economy since the 1930s. Make no mistake, the fact that the world’s biggest economy shed 533,000 jobs last month smacks of a slump.”
Dec 05, 2008
PRNewswire-USNewswire via COMTEX/
The Mortgage Bankers Association (MBA) said today that at least one out of every 10 homeowners is behind on their mortgage or already facing foreclosure, a fact that underscores what we already know is the gloomiest housing picture in the United States in decades, possibly ever. The MBA’s newest numbers for the three months ending September 30 also underscore what we and others, including many economists with expertise in housing issues, have been saying for over a year: Avoiding foreclosures that don’t need to happen is our country’s best hope for economic recovery. The reason Treasury Secretary Paulson has had to announce a new plan to prop up the economy every few weeks for over a year is that none of the plans launched so far — however well-intentioned and necessary — has addressed the runaway foreclosures that are at the root cause of today’s crisis, driving losses at financial institutions and driving down property values nationwide.
MarketWatch Last update: Dec. 5, 2008
“Through its 16,000 retail brokers known in the industry as the “thundering herd,” Merrill was a retail brokerage first, peddling stocks and bonds to everyday Americans seeking to put something away for retirement or for the kids’ college education. Friday, Merrill essentially took a final step toward disappearing as an independent firm as shareholders of both Bank of America Corp. and Mother Merrill voted in favor of what was once a $30.3 billion bid when it was announced in September, but had ebbed to just $19.7 as the stock of both companies had sunk.”
It seems appropriate as their ID is absorbed, the bull market is over. Government seems to be positioning itself to print money, like in the Weimar Republic, to address debt forgiveness.
I spent 30 minutes tonight listening to the request for $34 billion in “bridge loans” to the 3 American auto makers. And I wondered even if they got their bailout, who possibly is gonna buy your cars? Having heard some testimony for these CEOs in the second appearance in front of Congress, these 3 dorks led their companies to their disastrous point. Do these people follow markets? Did they not see a bubble? Did they not have economists who saw the day the bubble would burst with an affect on their business? Every CEO asking for a bailout has been paid way beyond common sense, unrestrained by boards of directors, and now they expected taxpayers to rescue them.
The way markets work is that companies go bankrupt. Old ways no longer always work. The market would be as cruel to the manufacturers of BMWs and Hondas. Bailouts were a form of illusion, to continue what will not work. Bailouts and bridge loans were for putting good money into bad. Why did the government not just buy GM stock and take over the business? That would be true nationalization. And we would not have anyone making incomes and stock options worth $5 million to $15 million a year. Means could be found to put an end to United Auto Workers’ wage of $60 an hour or more so American cars could compete in ten years in foreign lands. And government could stand behind guarentees to retired United Auto Workers who had earned their health care benefits over a lifetime. Government as the owner could actually maintain pension benefits.
The CEO from GM was discussing about how “we use our global capabilities.” I half expect any bridge loans to finance the building of new plants overseas where labor rates can be cut in half. The revolution in the world of auto sales has arrived. The compensation paid to the United Auto Workers is as much part of the problem. Here 2 sides of the aisle have come together, equity holders and blue collar workers, to keep what they always have had. It was like watching a loved one with cancer. And too many people were living in denial as to what all this meant. I was left wondering about the motives of CEOs who always paid themselves well, whose concerns were shareholders and not the government that they had come to asking for help.
Instead of a “bridge loan,” I would insist these CEOs be required to read On Death and Dying by Katherine Kubler Ross, on their ride home. But they were probably getting prepared to announce job cuts next week, like the CEO at Citibank last month, instead of shared paycuts.
baseball91