(26 Sep) "These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."
So said US Representative Barney Frank in an interview with the NY Times in 2003 - when there was an investigation into the accounting practices of those august agencies. Heaven forbid we'd do anything to change how those places operated - especially since they were so forthcoming with big campaign contributions to certain individuals and the like.
Must be great to be a DC politician and not ever have to worry about being held accountable for what you say...even though he is chastising members of the his opposition party now for supporting a bailout bill that is caused, in great part, by the lending policies of those agencies.
I was talking with a very smart and nice lady this morning about this dilemma and she asked me why we should bail anyone out. She is of the opinion that persons responsible for the decisions that created this problem should be penalized and their institutions allowed to fail. I'm not against that.
The however part to my response for this lady and others is that there is a panic. Panics are not based on facts.
Example - WaMu. I, personally, don't see why so many people took their money out of WaMu - a broad-based move that provided the final straw for its closure. Most of them went to credit unions or other banks so, technically, their money wasn't any safer. The failure of WaMu - as I alluded to in a recent post - was not a failure for the depositors - it was the failure of its business. Depositors now simply have accounts at JP Morgan - no muss, no fuss, no loss - as would the ones who left. Shareholders and bond holders will not be so lucky. They are now the owners of some very expensive wall paper, I'm afraid.
Now, back to the panic
Most people - regardless of age, gender, job, income or whatever - are basically ignorant about how our financial system works. Like any other pursuit, if you don't deal with it daily, there's no way you can get a handle on it all. Therefore, when the talking heads and the print media focus on credit swaps, CMOs, leverage and other arcane fiscal terms, the implication to the public is that it's all bad. The delivery and word styling ensure that.
And if all those "smart guys" - generically speaking, of course - can't get a handle on things, we poor taxpayers must really be in deep kimchi. Unfortunately, this financial ignorance is rampant in DC where, mostly, lawyers hang out. Lawyers who have little business experience to boot.
Their political machinations - always couched in "good intentions" - have led to what, I'm sure, most of them would protest as being unintended consequences. The mantras of "affordable housing", "the American Dream" and the like were all held up as excellent reasons for enacting rules, regulations and laws - or softening existing ones - that would allow social engineering to take precedent over economic realities. Buck passing is a fine art in DC and it's always some other guy/party/"special interest group" or, lest we forget, Wall Street, that is to blame. To me, it's all of the above.
As to how we got here - it doesn't matter. We're here and we have to play the hand we've been dealt. For whatever reason or reasons, many people are panicking. Why? Mostly because they are afraid of the unknown. So, the Feds have to do something to step up and say here's the plan, here's what we're going to do and that's the name of that song.
Banks have scads of money today - they're just afraid to lend it. The smaller community and regional banks and credit unions are generally doing fine but the names in the papers are in terminal fright mode. (Nothing worse than a scared banker...) The bigs have to be able to get out from under some of these bad loans and the Fed is the only place to send them. If we do like we did with the RTC in the 80s, we should be fine.
The key is to get something in place now and we can tinker with the details later. Money is what lubricates an economy. As with your car, if the lubrication is gone, the engine seizes up and you come to a dead stop.
We can't allow that.
The overall strength of the economy is good. A perfect example. Where and who else could even come up with $700 billion, still keep the proverbial lights on and everything else running, fer cryin' out loud? Nobody.
I am convinced that even the most financially-challenged of our DC friends will see the big picture and even this do nothing Congress will come to some agreement over the weekend.
If not, well, as they say on TV - "stay tuned for the exciting conclusion".
Friday, September 26, 2008
Thursday, September 25, 2008
Bailout clarity
(25 Sep) In responding to a question from one of the lesser lights in the Senate yesterday about the bailout plan he has proposed, Federal Reserve Chairman Ben Bernacke replied that the problem we're facing is not so much economic as it is psychological. He is spot on. The challenge is that if we let this psychological tail continue to wag our economy, we could definitely be in trouble. Therefore, we do the bailout.
As this is written, the word is that - no surprise here - our intrepid politicians have come to some agreement on passing the plan. The markets closed up a bit in response. Now, all we have to do is to get the members of Congress off their soap boxes long enough to actually vote for it and get it in the works.
Taxpayers, via the government, have a very good chance to make money from this
I know - the ever popular conventional wisdom has this $700 billion being spent hither and yon to bail out some faceless Wall Street guys and the poor taxpayers have to pay for it all. Sorry - wrong answer.
First, the entire amount may not be spent. However, if it all does get spent, whatever amount of money will be used to buy actual assets - pieces of functioning companies, bonds, preferred stocks, mortgages and similar instruments. Not all are top quality, to be sure, but neither are they all junk by any means.
Because of the recent market actions, most of this stuff is being valued at significantly lower numbers than even a month ago...and they were already low then. Because of the nature and pricing of these items, the yields (returns) that are generated even while the Feds just sit with them are at nice premiums over the prevailing market returns. That's one good thing.
The best thing is that the Feds have staying power. They can hold the various assets for whatever length of time they deem appropriate. So, they don't have to turn right around and sell all or part of the assets right away. They are buying low and - I firmly believe - will be selling higher, perhaps even much higher, than their cost.
Maybe we'll only break even on these trades - maybe we'll lose some of this money - but it surely won't be a $700 billion flush job.
Warren Buffet and I are buddies
Okay, I've never met the man nor do I own any of his Berkshire Hathaway stock. However, in a number of ways, I like the way he is talking about all that's going on. More important, he certainly put his money where his mouth is by putting $5 billion of the BH money into Goldman Sachs. If he didn't believe in our market and economy, I assure you that money would still be in his vault or pocket or whatever.
Another thing he does is buy value - not price. If he feels the investment warrants his money, he will put it in, regardless of what the overall market may be doing at that time. Here's a quote from him that reinforces that.
"Five years from now, 10 years from now, we'll look back on this period and we'll see that you could have made some extraordinary buys. That doesn't mean it won't get more extraordinary a week or a month from now. I have no idea what the stock market is going to do next month or six months from now."
I agree wholeheartedly with his long and short-term projections.
Short-term, the market responds to whatever news or challenge or opportunity is current. Look to the current market moves for the case right now, with logic seeming to have gone into hiding for a while. You should look for quality and look to the longer-term for your results. Over the long term, the markets behave in a rational and, yes, mostly predictable manner. As the saying goes, the trend is our friend.
In closing, here's a quote from Warren for you from yesterday. "I do know that the American economy, over a period of time, will do very well and people who own a piece of it will do well."
What he said...
As this is written, the word is that - no surprise here - our intrepid politicians have come to some agreement on passing the plan. The markets closed up a bit in response. Now, all we have to do is to get the members of Congress off their soap boxes long enough to actually vote for it and get it in the works.
Taxpayers, via the government, have a very good chance to make money from this
I know - the ever popular conventional wisdom has this $700 billion being spent hither and yon to bail out some faceless Wall Street guys and the poor taxpayers have to pay for it all. Sorry - wrong answer.
First, the entire amount may not be spent. However, if it all does get spent, whatever amount of money will be used to buy actual assets - pieces of functioning companies, bonds, preferred stocks, mortgages and similar instruments. Not all are top quality, to be sure, but neither are they all junk by any means.
Because of the recent market actions, most of this stuff is being valued at significantly lower numbers than even a month ago...and they were already low then. Because of the nature and pricing of these items, the yields (returns) that are generated even while the Feds just sit with them are at nice premiums over the prevailing market returns. That's one good thing.
The best thing is that the Feds have staying power. They can hold the various assets for whatever length of time they deem appropriate. So, they don't have to turn right around and sell all or part of the assets right away. They are buying low and - I firmly believe - will be selling higher, perhaps even much higher, than their cost.
Maybe we'll only break even on these trades - maybe we'll lose some of this money - but it surely won't be a $700 billion flush job.
Warren Buffet and I are buddies
Okay, I've never met the man nor do I own any of his Berkshire Hathaway stock. However, in a number of ways, I like the way he is talking about all that's going on. More important, he certainly put his money where his mouth is by putting $5 billion of the BH money into Goldman Sachs. If he didn't believe in our market and economy, I assure you that money would still be in his vault or pocket or whatever.
Another thing he does is buy value - not price. If he feels the investment warrants his money, he will put it in, regardless of what the overall market may be doing at that time. Here's a quote from him that reinforces that.
"Five years from now, 10 years from now, we'll look back on this period and we'll see that you could have made some extraordinary buys. That doesn't mean it won't get more extraordinary a week or a month from now. I have no idea what the stock market is going to do next month or six months from now."
I agree wholeheartedly with his long and short-term projections.
Short-term, the market responds to whatever news or challenge or opportunity is current. Look to the current market moves for the case right now, with logic seeming to have gone into hiding for a while. You should look for quality and look to the longer-term for your results. Over the long term, the markets behave in a rational and, yes, mostly predictable manner. As the saying goes, the trend is our friend.
In closing, here's a quote from Warren for you from yesterday. "I do know that the American economy, over a period of time, will do very well and people who own a piece of it will do well."
What he said...
Wednesday, September 24, 2008
Keep on bailing
(24 Sept 2008) So, last Thursday and Friday the markets responded strongly upward when the word got out about the rescue/bailout plan proposed to help solve the housing-induced credit challenges.
Then, Monday and Tuesday, we had "ideas" and strings put forth by certain political party members. These "great" insights prompted the selloff of the first two days this week.. Here's a hint for politicians and other socialist-minded folks. You do NOT dictate how much people make. This isn't France - yet.
Unless you are a government worker motivated, presumably, by the benefit programs, you are probably profit motivated. You may take some risk but you know that the potential of a reward for that risk is there. It's called capitalism, folks. You know - the golden goose; the source of all the money everybody spends.
As I mentioned yesterday, the fact that there is an election is making this situation even more problematic than it is on its own. Each side is trying to make its point of view heard. Neither one has said much that impresses me so far. The very worst idea is to stop this plan altogether. Here's why I say that.
First, for the record, and as you can see by reading past posts, I am not fan of across the board bailouts. It's bad for the system. Some entities should absolutely to "allowed" to fail. This situation, I believe, is way outside the box. $700 billion is more than most of us can even imagine, so there's a bit of a feeling of being overwhelmed. There's also some of the "where's mine" mentality coming to the fore. Well, yours, so to speak, is included in this package. Without it, you - and the rest of us - are going to get into a really big mess that will last a whole lot longer than it needs to.
A short summary of the deal
This program does have precedence. There was the Resolution Trust Corporation (RTC) of the 80s that was established to pick up the pieces from the S&Ls that went upside down. Guess what? We - the same taxpayers that are now, purportedly, being "held up" for this - actually made out pretty well. We made money.
In this current plan, we taxpayers will have an equity (ownership) stake in the assets that would be sold by banks to other corporate money types. Seems to me that the doomsayers are assuming that the markets - stock or housing - will never recover and, therefore, we will lose money on the assets. They always say, "what if it doesn't work?" Well, my clever response is, "what if it does?" Those cats never assume the best or even better in a situation.
By instituting the plan, confidence can be allowed to come back into the markets and bankers will be motivated to move all that money they are currently sitting on into the hands of individuals and business and off we go again. Sure, that's simplistic but that's what will happen - without all the ten dollar words and serious demeanors.
Events like this don't happen everyday so we must utilize unusual methods to deal with them. I think that, as the RTC did, we can make money on this and get the credit system running again.
One of those win-win deals...
Then, Monday and Tuesday, we had "ideas" and strings put forth by certain political party members. These "great" insights prompted the selloff of the first two days this week.. Here's a hint for politicians and other socialist-minded folks. You do NOT dictate how much people make. This isn't France - yet.
Unless you are a government worker motivated, presumably, by the benefit programs, you are probably profit motivated. You may take some risk but you know that the potential of a reward for that risk is there. It's called capitalism, folks. You know - the golden goose; the source of all the money everybody spends.
As I mentioned yesterday, the fact that there is an election is making this situation even more problematic than it is on its own. Each side is trying to make its point of view heard. Neither one has said much that impresses me so far. The very worst idea is to stop this plan altogether. Here's why I say that.
First, for the record, and as you can see by reading past posts, I am not fan of across the board bailouts. It's bad for the system. Some entities should absolutely to "allowed" to fail. This situation, I believe, is way outside the box. $700 billion is more than most of us can even imagine, so there's a bit of a feeling of being overwhelmed. There's also some of the "where's mine" mentality coming to the fore. Well, yours, so to speak, is included in this package. Without it, you - and the rest of us - are going to get into a really big mess that will last a whole lot longer than it needs to.
A short summary of the deal
This program does have precedence. There was the Resolution Trust Corporation (RTC) of the 80s that was established to pick up the pieces from the S&Ls that went upside down. Guess what? We - the same taxpayers that are now, purportedly, being "held up" for this - actually made out pretty well. We made money.
In this current plan, we taxpayers will have an equity (ownership) stake in the assets that would be sold by banks to other corporate money types. Seems to me that the doomsayers are assuming that the markets - stock or housing - will never recover and, therefore, we will lose money on the assets. They always say, "what if it doesn't work?" Well, my clever response is, "what if it does?" Those cats never assume the best or even better in a situation.
By instituting the plan, confidence can be allowed to come back into the markets and bankers will be motivated to move all that money they are currently sitting on into the hands of individuals and business and off we go again. Sure, that's simplistic but that's what will happen - without all the ten dollar words and serious demeanors.
Events like this don't happen everyday so we must utilize unusual methods to deal with them. I think that, as the RTC did, we can make money on this and get the credit system running again.
One of those win-win deals...
Tuesday, September 23, 2008
Some interesting facts
Monday saw the market give back what it made on Friday. Tuesday, it was another trip to the bargain basement - though not as much or nearly as dramatic as Monday.
Seems like all that Congress is doing is a really good group imitation of Nero and putting together a fiddle concert while the markets ebb and flow around the latest news or spin. No wonder those people are held in such collective low regard. They've never met a decision they couldn't avoid or defer. Now, with their jobs at stake, it gets even more ridiculous. With so many lawyers in the place, it's no wonder the air is being filled with variations on "yeah, but..." and not much else.
Just the facts, Jack
The boys in the movie "Stripes" had it right when that's what they called for. So, let's attempt to quantify some of what's actually going on in the market place. The following data come from BTN Research, Barron's, the Wall Street Journal and BusinessWeek.
I know that the consensus seems to be that we haven't seen such market swings in recorded history. Not so fast.
Last week, we had the Standard & Poors 500 Index drop 4.7% on both Monday and Wednesday. Through Monday, we've had day-over-day changes of, at least, 2% during 8 of the prior 13 trading days. It's amazing that the folks on the floor aren't all wearing neck braces with all that whiplashing going on.
Way back in 2002 - eons ago in the newsreaders world - we had a bear market. (That's when a market is down, at least, 20% from its high. Oh, forgot to mention - we've had, including this one, 10 bear markets since 1957 or about 1 every 5 years.) The point is that, we had 11 of these 2% flips in a 20 day period. It's dang near amazing that anyone is left alive to tell the tale...
Interestingly - to me, anyway - is the fact that these type occurrences have happened close to, if not at, the markets in that cycle. I'm not saying that this is the low - it's just symptomatic of what happens at the lows.
Price to earnings insight
The price to earnings, (P/E), ratio is defined as a company's current stock price divided by its earnings for the trailing twelve month period. In the case of the S&P 500, its the composite of the stock prices in the Index, divided by their cumulative trailing earnings. Here's the relevance of that little gem.
When we hit the low in 2002, the S&P 500 Index had a P/E of 27.1. The value at the end of last week was 24.2. Given that a low P/E suggests that an issue - or index - may be undervalued, this reinforces to me that we're pretty dang low, relatively speaking.
And, in conclusion...
For further perspective. On October 19, 1987, we had the largest one day drop in the whole history of the S&P 500 Index. In one day - rather than doing this Chinese water torture thing we've been enduring - we sold off 20.5%. That would equate to a drop of over 2200 points today...
It was exciting then - as this stuff is today. Here's my point.
We're scads higher than we were in 1987 - even though hell and perdition was in the media then, just as it is today. Everything we have and do today is better.
You can either wallow in what was or "might have been" or you can get in the game and select from all the wonderful opportunities for you that have been created by this market action to have the chance to earn a huge return over the next few years.
Nothing is for sure. The risk of the unknown in terms of when and amount is why stocks and stock mutual funds return what they have over time. You can be safe in, essentially, non-yielding bonds and CDs or you can be sorry you missed on the opportunity for real and significant returns.
It's your money...
Seems like all that Congress is doing is a really good group imitation of Nero and putting together a fiddle concert while the markets ebb and flow around the latest news or spin. No wonder those people are held in such collective low regard. They've never met a decision they couldn't avoid or defer. Now, with their jobs at stake, it gets even more ridiculous. With so many lawyers in the place, it's no wonder the air is being filled with variations on "yeah, but..." and not much else.
Just the facts, Jack
The boys in the movie "Stripes" had it right when that's what they called for. So, let's attempt to quantify some of what's actually going on in the market place. The following data come from BTN Research, Barron's, the Wall Street Journal and BusinessWeek.
I know that the consensus seems to be that we haven't seen such market swings in recorded history. Not so fast.
Last week, we had the Standard & Poors 500 Index drop 4.7% on both Monday and Wednesday. Through Monday, we've had day-over-day changes of, at least, 2% during 8 of the prior 13 trading days. It's amazing that the folks on the floor aren't all wearing neck braces with all that whiplashing going on.
Way back in 2002 - eons ago in the newsreaders world - we had a bear market. (That's when a market is down, at least, 20% from its high. Oh, forgot to mention - we've had, including this one, 10 bear markets since 1957 or about 1 every 5 years.) The point is that, we had 11 of these 2% flips in a 20 day period. It's dang near amazing that anyone is left alive to tell the tale...
Interestingly - to me, anyway - is the fact that these type occurrences have happened close to, if not at, the markets in that cycle. I'm not saying that this is the low - it's just symptomatic of what happens at the lows.
Price to earnings insight
The price to earnings, (P/E), ratio is defined as a company's current stock price divided by its earnings for the trailing twelve month period. In the case of the S&P 500, its the composite of the stock prices in the Index, divided by their cumulative trailing earnings. Here's the relevance of that little gem.
When we hit the low in 2002, the S&P 500 Index had a P/E of 27.1. The value at the end of last week was 24.2. Given that a low P/E suggests that an issue - or index - may be undervalued, this reinforces to me that we're pretty dang low, relatively speaking.
And, in conclusion...
For further perspective. On October 19, 1987, we had the largest one day drop in the whole history of the S&P 500 Index. In one day - rather than doing this Chinese water torture thing we've been enduring - we sold off 20.5%. That would equate to a drop of over 2200 points today...
It was exciting then - as this stuff is today. Here's my point.
We're scads higher than we were in 1987 - even though hell and perdition was in the media then, just as it is today. Everything we have and do today is better.
You can either wallow in what was or "might have been" or you can get in the game and select from all the wonderful opportunities for you that have been created by this market action to have the chance to earn a huge return over the next few years.
Nothing is for sure. The risk of the unknown in terms of when and amount is why stocks and stock mutual funds return what they have over time. You can be safe in, essentially, non-yielding bonds and CDs or you can be sorry you missed on the opportunity for real and significant returns.
It's your money...
Monday, September 22, 2008
We have met the enemy and he is us...
From the Pogo comic strip comes the wisdom to confront who is at the base of all this financial confusion and carrying on. The election certainly has added to the pollution of blame making and turbo-obfuscation.
In fact, everyone of us has had a hand in this in some way, shape or form. Whether we personally created policies or simply let them ride - we all have a piece of this pie.
Real estate
You ever hear of or see the television program called "Flip That House?" The whole thing was based upon the implied premise that whomever could buy a house almost anywhere, fix it up and expect to sell it at a very nice profit. And it worked for a long time. Only recently have there been caveats that everybody shouldn't expect it all to go smoothly. The point is that everywhere there was the assumption that "of course" prices would continue to rise as demand went up as more and more people had access to money to buy properties.
There was never a program called "Qualify for the Loan." Nobody wants that much reality, I guess. The creation of "programs" to allow individuals who otherwise would have never been able to qualify for - much less continue to support - a mortgage payment was seen as being "socially responsible."
How about that leverage? Use the equity in a just bought house, with an assumed continued increase in value, to help support a new loan. That loan would be used to buy another house and the cycle begun again. Pretty soon, you too could be a real estate magnate. That works as long as everybody pays the mortgages on time, there's no abandoning the property due to inability to pay and, finally, the values continue to rise. Any one of those legs break and it's all fall down time. The pieces and real price of such schemes can be seen in many parts of the country - but not all.
Stock market
When Fred Flintstone and I started in this biz, it really was only a stock market. Now, the term has been expanded to include almost any number of various and varied investments - some of which occasionally do actually have to do with individual company shares.
A lot of the stock market's recent challenges are based on leverage and the use of derivative trading. The latter means that the specific investment is based upon, i.e., derived from, another type investment. The buying and selling of mortgage-backed securities, trading in financial futures, the rise of hedge funds and other such things moved us further away from the outright ownership of solid businesses that provide us with what we need to live and prosper. All these others are - or were - much more ephemeral. That's why it's going to be so hard to work out the Lehman bankruptcy. How do you value stuff that is, in essence, artificial to begin with?
More, more, more
This song title is somewhat symptomatic of our current overall demand driven state. Combine that with a movement by many to have "someone else" pay for their needs - while not adequately ensuring that resources are available to support these demands. How else do you explain that people demand more "labor saving," energy using things - not just cars - but aren't willing to drill for the oil or create the pipelines or power stations to provide them? Might hurt a bug, bird or fish, you know...like those matter.
Now we have many who don't pay any taxes who are helping fuel demand for better education and housing services to provide for their needs. We want - no, demand - state-of-the-art medical care but scream if health care premiums go up.
Get real, folks. Someone has to pay for everything - somehow, sometime. It's just a matter of when and who. And it looks as if when is fast becoming now...who is more of a moving target right now.
I am not now - nor ever will be - a pessimist. I am firmly rooted in the belief of abundance and positive growth. However, as those who have participated in competitive athletics are well aware, there is never a gain without some degree of pain.
Economically and financially, we have to work through this current confusion and not give up when we first think we're mentally tired or sore...and, again, want someone else to do it. Most of us are tough enough to do this. The others, as usual, will ride on our labors and complain.
Nonetheless, and in spite of the current confusion, I truly believe this -
The future's so bright - I have to wear shades...
In fact, everyone of us has had a hand in this in some way, shape or form. Whether we personally created policies or simply let them ride - we all have a piece of this pie.
Real estate
You ever hear of or see the television program called "Flip That House?" The whole thing was based upon the implied premise that whomever could buy a house almost anywhere, fix it up and expect to sell it at a very nice profit. And it worked for a long time. Only recently have there been caveats that everybody shouldn't expect it all to go smoothly. The point is that everywhere there was the assumption that "of course" prices would continue to rise as demand went up as more and more people had access to money to buy properties.
There was never a program called "Qualify for the Loan." Nobody wants that much reality, I guess. The creation of "programs" to allow individuals who otherwise would have never been able to qualify for - much less continue to support - a mortgage payment was seen as being "socially responsible."
How about that leverage? Use the equity in a just bought house, with an assumed continued increase in value, to help support a new loan. That loan would be used to buy another house and the cycle begun again. Pretty soon, you too could be a real estate magnate. That works as long as everybody pays the mortgages on time, there's no abandoning the property due to inability to pay and, finally, the values continue to rise. Any one of those legs break and it's all fall down time. The pieces and real price of such schemes can be seen in many parts of the country - but not all.
Stock market
When Fred Flintstone and I started in this biz, it really was only a stock market. Now, the term has been expanded to include almost any number of various and varied investments - some of which occasionally do actually have to do with individual company shares.
A lot of the stock market's recent challenges are based on leverage and the use of derivative trading. The latter means that the specific investment is based upon, i.e., derived from, another type investment. The buying and selling of mortgage-backed securities, trading in financial futures, the rise of hedge funds and other such things moved us further away from the outright ownership of solid businesses that provide us with what we need to live and prosper. All these others are - or were - much more ephemeral. That's why it's going to be so hard to work out the Lehman bankruptcy. How do you value stuff that is, in essence, artificial to begin with?
More, more, more
This song title is somewhat symptomatic of our current overall demand driven state. Combine that with a movement by many to have "someone else" pay for their needs - while not adequately ensuring that resources are available to support these demands. How else do you explain that people demand more "labor saving," energy using things - not just cars - but aren't willing to drill for the oil or create the pipelines or power stations to provide them? Might hurt a bug, bird or fish, you know...like those matter.
Now we have many who don't pay any taxes who are helping fuel demand for better education and housing services to provide for their needs. We want - no, demand - state-of-the-art medical care but scream if health care premiums go up.
Get real, folks. Someone has to pay for everything - somehow, sometime. It's just a matter of when and who. And it looks as if when is fast becoming now...who is more of a moving target right now.
I am not now - nor ever will be - a pessimist. I am firmly rooted in the belief of abundance and positive growth. However, as those who have participated in competitive athletics are well aware, there is never a gain without some degree of pain.
Economically and financially, we have to work through this current confusion and not give up when we first think we're mentally tired or sore...and, again, want someone else to do it. Most of us are tough enough to do this. The others, as usual, will ride on our labors and complain.
Nonetheless, and in spite of the current confusion, I truly believe this -
The future's so bright - I have to wear shades...
Is my bank okay?
I was at a corporate meeting with about 200 of my peers the last two days of last week so wasn't able to post.
One thing that was quite noticeable at the gathering was the overall lack of worry about the trend of the markets. Many of us have "seen the movie" before and don't get all frothy at the challenge du jour. Others, who aren't as long in the tooth (where the heck did that come from anyway?), aren't as sanguine perhaps but neither do they feel the concern that the public has been evidencing. Why? Well, as part of their training, they are exposed to past market history and causes and so can make better informed conclusions.
I think the more important fact that we all feel to be true is that the US financial (stock, bond and money) markets have been through a lot worse - many times in our history - and, without exception, have always come back. The rapidity of that return has definitely varied but the return itself has always taken place.
Once again, emotions overcame logic
People determined they'd had enough and took their money out of banks in huge numbers last week. Why? They were scared. What were they scared of? It has many names but it all comes down to, basically, the unknown. And, of course, they use seemingly logical reasons to cover for this emotional cause.
Where did they put the money? Well, if the banks aren't safe - millions determined that we must put it in gold, our personal safes, a credit union and, of course, the US Treasury. Let's see.
Gold has not proven to be much of a good investment over the last 100 years - yet the old magic still holds sway with many, I guess. Sure, it was up a bunch in one day last week but it had dropped over 30% in the last two months.
Personal safes (or the mattress or coffee can, if you are safe-challenged). Can you say "zero return and dubious safety?"
Credit unions are simply bank variants without a lot of the bells and whistles of a large bank. So, some may feel they're less exposed but the credit unions still have to participate in the national markets for their own investments. So, the real safety of your assets has to do with the acumen of the person who invests on behalf of the credit union. (By the way, I don't think there are any credit unions in any trouble.) That leaves us with the US Treasury.
Interesting that with so many purportedly concerned about the safety of the guarantees of their deposits, i.e., the FDIC - as in the Federal Deposit Insurance Corporation - they go right to the source itself and pour bazillions into 90 day US (Federal) Treasury Bills. The result was laughable in a painful way.
The return on the bills went to 10 basis points. That's only one-tenth of one percent. If you had put, say, $50,000 into one of these T-bills, you shall have earned about 12 bucks at the end of three months . What's the point of that??? Oh, yeah - my money is safe - that's it. I think that safe in the minds of most minds of most means that the numbers on their statements stay relatively the same. The only thing it's really safe from at those rates is profit.
If you factor inflation into this "return", you have a gilt-edged, guaranteed loss. As I said, logic has left the building.
Are banks safe?
In almost all cases - regardless of size - I'd say no worries. Some will probably still fail. That does NOT mean that the depositors fail too. Now we're back to the FDIC.
If you have - including interest - up to $100,000 in a failed bank, the biggest challenge you have is really just near-term access. If a bank fails, one, or more, others, will be very glad to step up and now have a bunch of new depositors. Once the paperwork is done, your money is now in a new account at a new bank. When the S&Ls went upside down, this is exactly what happened. It's happened with every bank that has closed its doors since the FDIC was formed.
The caveat is the time it takes. In my experience, it's about four weeks to get access back, so it may be prudent to have more than one banking relationship - only if you remained concerned about your institution.
Bottom line - don't worry about the banks or your deposits.
In the meantime, it's not too late to get back into the equities market. There's still over $3.7 Trillion sitting in the money market accounts. People who didn't move money out of their stock positions at the first of last week are glad they didn't.
Keep in mind that most of the money made in any bull market is usually in its beginning phases...
One thing that was quite noticeable at the gathering was the overall lack of worry about the trend of the markets. Many of us have "seen the movie" before and don't get all frothy at the challenge du jour. Others, who aren't as long in the tooth (where the heck did that come from anyway?), aren't as sanguine perhaps but neither do they feel the concern that the public has been evidencing. Why? Well, as part of their training, they are exposed to past market history and causes and so can make better informed conclusions.
I think the more important fact that we all feel to be true is that the US financial (stock, bond and money) markets have been through a lot worse - many times in our history - and, without exception, have always come back. The rapidity of that return has definitely varied but the return itself has always taken place.
Once again, emotions overcame logic
People determined they'd had enough and took their money out of banks in huge numbers last week. Why? They were scared. What were they scared of? It has many names but it all comes down to, basically, the unknown. And, of course, they use seemingly logical reasons to cover for this emotional cause.
Where did they put the money? Well, if the banks aren't safe - millions determined that we must put it in gold, our personal safes, a credit union and, of course, the US Treasury. Let's see.
Gold has not proven to be much of a good investment over the last 100 years - yet the old magic still holds sway with many, I guess. Sure, it was up a bunch in one day last week but it had dropped over 30% in the last two months.
Personal safes (or the mattress or coffee can, if you are safe-challenged). Can you say "zero return and dubious safety?"
Credit unions are simply bank variants without a lot of the bells and whistles of a large bank. So, some may feel they're less exposed but the credit unions still have to participate in the national markets for their own investments. So, the real safety of your assets has to do with the acumen of the person who invests on behalf of the credit union. (By the way, I don't think there are any credit unions in any trouble.) That leaves us with the US Treasury.
Interesting that with so many purportedly concerned about the safety of the guarantees of their deposits, i.e., the FDIC - as in the Federal Deposit Insurance Corporation - they go right to the source itself and pour bazillions into 90 day US (Federal) Treasury Bills. The result was laughable in a painful way.
The return on the bills went to 10 basis points. That's only one-tenth of one percent. If you had put, say, $50,000 into one of these T-bills, you shall have earned about 12 bucks at the end of three months . What's the point of that??? Oh, yeah - my money is safe - that's it. I think that safe in the minds of most minds of most means that the numbers on their statements stay relatively the same. The only thing it's really safe from at those rates is profit.
If you factor inflation into this "return", you have a gilt-edged, guaranteed loss. As I said, logic has left the building.
Are banks safe?
In almost all cases - regardless of size - I'd say no worries. Some will probably still fail. That does NOT mean that the depositors fail too. Now we're back to the FDIC.
If you have - including interest - up to $100,000 in a failed bank, the biggest challenge you have is really just near-term access. If a bank fails, one, or more, others, will be very glad to step up and now have a bunch of new depositors. Once the paperwork is done, your money is now in a new account at a new bank. When the S&Ls went upside down, this is exactly what happened. It's happened with every bank that has closed its doors since the FDIC was formed.
The caveat is the time it takes. In my experience, it's about four weeks to get access back, so it may be prudent to have more than one banking relationship - only if you remained concerned about your institution.
Bottom line - don't worry about the banks or your deposits.
In the meantime, it's not too late to get back into the equities market. There's still over $3.7 Trillion sitting in the money market accounts. People who didn't move money out of their stock positions at the first of last week are glad they didn't.
Keep in mind that most of the money made in any bull market is usually in its beginning phases...
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