Some Thoughts and Perspective

Given the recent economic activity and volatility in the market, I thought I would provide some perspective on some of the recent news.

On November 28th the National Bureau of Economic Research (NBER, the group primarily responsible for cataloguing economic cycles) agreed as a committee that in December 2007 we reached a peak in Economic expansion*. When a peak is identified it means that we have entered into recession. They define a recession as a significant decline in economic activity that is spread broadly throughout the economy that lasts more than a few months.

The committee measures the economic activity by looking at production, employment, and real income (and other factors at their discretion to determine when the majority of the economy is in decline). While employment clearly peaked in December 2007, other indicators showed a flat to low growth from December 2007 through June 2008. As Brian Wesbury, Chief Economist at First Trust has said, “…it appears that the NBER has said a strong enough decline in one sector of the economy can actually lead to a recession, even if the rest of the economy seems to be doing relatively well.”

I believe they could have, and perhaps should have, called the peak anywhere between January and June of 08 because it was somewhere in that range that the peak of the majority (ie., GDP which didn’t go negative, signifying growth, until the 3rd quarter*; and Sales which reached a peak in the 2nd quarter*) of economic activity occurred.

Despite the interesting call of recession starting at the end of last year, real issues seem to have begun in September, when risk aversion hit an irrational high.

These issues have significantly slowed and almost stopped the velocity at which money is moving through the economy. This is where the credit crisis really began to peak. The government is pumping in money at the fastest rate in history, but as it is being pumped in, it hasn’t been moving. Now we might be seeing some changes to that. Here are comments from Bob Doll, Vice Chairman at BlackRock.

“The next step for the markets is to determine the depth and duration of the economic downturn. Once this happens, we believe investors in riskier assets such as equities and corporate bonds will look over the valley and ignore bad news, helping those assets to post sustainable rallies – but not until the deterioration in the economy stops. The data needs to get better to spark such a rally and we are nowhere close to that, so it seems.

“We believe that, in the coming weeks, global depression fears will begin to peak and confidence will emerge that the deflation-fighting initiatives will have a positive effect on economic conditions. That said, no one knows for sure how the economy, or the stock market for that matter, will behave. However, we reiterate that the October 10 and November 19 bottoms look like a basing process.

“All of the variables to date – fiscal and monetary policy initiatives, the price of oil, lower government bond yields, political change in Washington and now quantitative easing by the Federal Reserve – seem to be working together to arrest the credit crisis, bolster economic activity and put a floor under deeply distressed stock prices. Confidence is the key. If confidence can be rebuilt, stock markets will perhaps anticipate a recovery. Although we are not making a case for it yet, a lot of ingredients seem to be falling into place.”

Like Mr. Doll, I believe that if, and that’s a big if, confidence can be restored throughout our economy and most especially with small businesses and consumers, we can get out of this mess. The money is there, and policy is in place. We just need that money to begin moving.

*www.nber.org *www.bea.gov *www.census.gov

A Strategy

This is a great article about what kind of economic strategy we need in order to get out of this mess and think more long term. "Why America Needs an Economic Strategy."

Non-Partisan

Has anyone else noticed that lately when politicians say that they are non-partisan and they are going to work on a bi-partisan approach/program/anything, they are not really meaning that they are going to sit down with those of other parties and through giving and taking ideas, come out with the best possible solution that the majority can support? What they are meaning is that, I will sit down with those of other parties and argue until I am able to convince them that my way is best without any negotiations.

There was a great article written by the daughter of a former Senator that I thought did a good job explaining how things used to work: A Time When Partisanship Didn't Exist. I don't fully agree with what she summizes happened to change things, but I am 100% behind her suggestion on how we can change it.

So what did happen?

I think there is really one explanation for it that manifests itself in two different ways. As a society we have become so seperated from each other that we no longer know what is reality. We communicate with each other face to face on a such a limited basis now that our entire world has been given to us through what we watch on TV, see in Movies, and hear on the radio. We all know how the media (a minority in this country) have been able to convince the masses of what is "really" going on. How has this changed our politics?

First, our politicians have moved to pushing for what they see as good for those who reach them the loudest. They all want to be seen as Jimmy Stewart was when he portrayed Mr. Smith in "Mr. Smith goes to Washington". Rather than find out what would be something they could do that would be a good thing, they pick up on what the loudest (usually the minority) want and do whatever it takes to give it to them (as long as it follows their party beliefs).

Second, we want to see our representatives fighting for what they believe in, not giving in to anyone else. We want to see them "win" no matter the cost. The problem has become that the minority are loudly proclaiming that they want the majority to accept their demands and just deal with it.

How do we get out of this mess?

I think that we really need to, as voters, begin working together to sort out our differences (and yes there will be some give and take, which is possible on the major issues facing our country without sacrificing basic individual values) which will then hopefully translate into our elected officials doing the same.

What exactly has the Government done?

The headline of a recent article written by Greensboro’s own Orson Scott Card caught my attention this week. “Would the Last Honest Reporter Please Turn on the Lights?” Mr. Card goes on to talk about the poor journalism of late regarding our financial crisis and I tend to agree with him. It seems that in this overly political environment even something as critical as this crisis gets a political “spin” placed on it.

The media has tended to stretch truths, ignore information, and focus on unimportant issues lately and the political candidates have been only slightly better. It is no wonder that so many have been very confused as to what plan the government is implementing and whether or not it will help our economy. While many debate who is at fault for this crisis and whether or not the government should be intervening, this article is meant to point out what plans are currently in place.

First and foremost, while there are many manifestations of our current problems there are really two main problems: The credit market is struggling and home values have plummeted (only by 5% in Charlotte since its peak, but by an average of 17% for 10 Major Market Cities and 20% for the 20 Major Market Cities 1). In order to target these two major problems, and hopefully stop their destructive spreading into other areas, the government has taken many different steps.

Money market funds have been guaranteed. Rates were lowered from 4.25% to 1.0%. Facilities were introduced that allow the Fed to ensure the liquidity and operation of money market mutual funds. The Housing and Economic Relief Act (HERA) was passed which is a $300 billion program designed to help over 400,000 homeowners avoid foreclosure and began October 1st (it seems this program is the most ignored lately by the media) 2. All debt and loans issued by Fannie and Freddie have been guaranteed 3. Finally, they passed the recent Emergency Economic Stabilization Act (EESA). This final Act is what I would like to spend the rest of this article discussing. EESA has many provisions, the largest of which, and most talked about in the media, is the Troubled Asset Relief Program (TARP). While the TARP, which is the $700 billion allocated to purchase troubled assets, has gotten the most media attention, there are other parts that are just as important.

EESA allows the Treasury to be more involved in Hope for Homeowners (part of HERA) by helping coordinate all federal groups that hold troubled mortgage. This gives them a better opportunity to modify loans and help avoid foreclosures. It also increases the number of those eligible for help and gives the Hope for Homeowners program more tools to help work with lenders.

Another part of EESA that has been talked about, but deserves mentioning again is the increased FDIC insurance from $100,000 to $250,000. This increase will end unless further action is taken on December 31st 2009. Meaning that your FDIC insured deposits are insured with some limitations, until December 31st 2009, up to $250,000. (see http://www.fdic.gov/ for details)

EESA also extends the Alternative Minimum Tax breaks and increases the AMT exemption amounts. It also extends other tax breaks which would have ended soon and here is a highlight of some of the breaks given: The optional itemized deduction of state and local taxes, the deduction for qualified tuition and related expenses, the business research and development credit, and tax-free contributions from IRAs to charities. This provision in EESA was extremely important and necessary, but got little to no press.

At a time when reporters and politicians are not giving adequate information it becomes increasingly difficult and yet more important to get the whole truth. I believe it is this lack of information which spreads fear. If you would like to read more than what I’ve written go to http://financialservices.house.gov/essa and click on the Section by Section option.
Keep in mind also that many of these programs began this month. We don’t know for sure if these plans will fix all our problems, but we are seeing evidence that they might be starting to.

1 http://www.standardandpoors.com/ Home Price Index History
2 http://www.hopeforhomeowners.co/
3 http://www.ustreas.gov/

Politicians, Reporters, and Economists...oh my!

It is official; we have entered into uncertain times. A year ago today if you would have thought about what was going to happen by the end of the credit crisis (we knew the crisis began a little over a year ago), would you have thought Bear Stearns, Lehman, Merrill Lynch, and Fannie and Freddie would no longer exist as we knew them?

Of course we still have the “comfort” of the constants in our society
Politicians still tout that they have all of the answers and will somehow (while increasing or decreasing government involvement) be able to fix all of the wrongs in our society. Reporters are still ignoring those little facts that can truly affect the outcome of our current predicament because those facts don’t incite extreme reactions (they really need increased viewers and advertising). Economists, also known as the “on the other hand” advisors, for the most part are touting how their predictions could still be right regardless of what fundamental news comes out.
Even though this model exists, the problem lies in that politicians, reporters, and economists are the loudest and it can be hard to see exactly what is happening with the fundamentals. In an effort to sneak through the noise, here is some of the important information that is particularly pertinent to your financial plans.

Recession has been talked about for over a year now and even though we have posted one quarter of negative GDP growth we have not entered into a recession. With this recent blow recession talks are back. This time around if we do enter a recession it will likely be a consumer-led recession. Consumers have their backs to the wall with debt levels at all-time highs, purchasing on credit virtually out of the question with really tough lending standards, disposable income expected to drop significantly in the 3rd and 4th quarters of 08’, and net-worth having fallen along with home values. Consumers might be helped if commodity prices continue to fall. According to www.bls.gov, the consumer price index recently dropped in August by .1%, though versus last year we are still up 5.4% (highest levels since 1991). So even though prices are down for August, they are more than 50% higher than they were a year ago, again according to www.bls.gov.

Retail sales recently began to show signs of a weakened consumer with sales down .3% in August, but keep in mind that sales were still up 1.6% versus last year, according to www.census.gov. Sales should be very closely watched through these holiday shopping months as the consumer is continually pressured.

For some good news: If we truly are entering into a recession, historically the stock market has reacted by dropping prior to the actual “official” start and then rising again before the bottom. If we enter into a recession, and if it is towards the end of this year/beginning of next, then we might be able to say we are close to the bottom of the stock market drop. This is what has happened historically and is not a guarantee of what will happen this time around, but it is interesting to note.

In the past the average drop in the market during a recession has been around 28% according to Nouriel Roubini’s Global EconoMonitor. The Dow is down 23% since the peak of October 9th and we have yet to technically enter into a recession.

We also had some good news recently that some posed as bad news (there are those reporters again). Housing starts were down significantly in August by 6.2%, bringing starts down by 33% versus a year ago, according to www.census.gov. How can this be good news? If you combine it with the significant rise in mortgage applications then you have a recipe for reducing inventories, which is a necessary step toward a sustainable national recovery. Once there are fewer houses than there are demand for, prices can begin to increase again.The key during any market, up or down, is to watch the trends, listen for the fundamentals and take the noise from politicians, reporters, and economists for what it is actually worth.