In its statement, the FOMC said that it expects inflation to moderate in the coming months. To us, it appears as though inflation will not moderate unless the economy implodes under the weight of food and energy prices of the Fed makes it moderate via a more restrictive Fed policy. It appears as though the Fed and Wall Street strategists who believe slackening consumer demand will cause moderating inflation are willing to risk an economic catastrophe for consumers to keep the banks afloat. This may end up being the correct strategy, but we believe it is naive to think that slackening consumer spending will lead to lower inflation and better conditions for consumers.
Currently, we are in a rob Peter to pay Paul scenario. Although core inflation is not dangerously high and it very well could lead to lower core inflation down the road, how we arrive at lower inflation will be stressful for consumers. We will arrive at lower core inflation by way of an increasing amount of consumer cash going to pay for food and energy instead of televisions and electronics. Sure, core inflation may fall, but consumers will be spending at least as much.
Also, falling discretionary spending could lead to more layoffs. The Fed and some strategists point to this likelihood almost as a positive stating that this should lead to reduced spending and moderating inflation. The only way it leads to lower food and energy prices is if people can no longer afford to subsist. Consumers will use money which had been used for discretionary spending or investing (in the markets, business startups etc.), which is more productive for the economy, and instead spend it on survival (food and energy).
This isn't Mr. Bernanke's fault. Some blame can be laid at the feet of Alan Greenspan, but the real culprits are financial institutions who saw dollar signs and believed models which executives did not understand, but told a story they wanted to hear.
Mr. Bernanke knows that higher borrowing rates would have a moderating effect on food and energy prices, but he is handcuffed by troubled banks and brokers. Anger directed toward the Fed or oil companies is misplaced aggression. Anger should be directed toward financial institutions.
Friday, June 27, 2008
Tuesday, June 24, 2008
V A C A T I O N
I am on vacation this week, but had to say something today.
Got to keep the loonies on the path
Are the inmates running the asylum? An article in today's Wall Street Journal indicates that the no money down mortgage is alive and well and is, in some cases, being facilitated by the U.S. government, non-profits and home builders. What is going on here?
Some government officials believe that the no money don mortgage helps the FHA assist first-time home buyers. Home builders like these kinds of mortgages because it attracts buyers. One can almost excuse the FHA due to its stated mission, but is it wise for homebuilders (most whom are troubled) to attract buyers who cannot afford a down payment on the home of their choice. Non-profits may be well intentioned, but due to their specific agenda's care little about the overall effects of no money down financing.
Today's Journal quotes a new home buyer who said she couldn't have purchased her condo without down payment assistance from the seller. She stated: "I was having a hard time just trying to save because I was spending from week to week trying to live."
First off, maybe she shouldn't be purchasing a home. There is no divine right to homeownership. If one is not in the financial position to save any money, it is unlikely that person will be able to weather an unforeseen financial emergency.
Secondly, the ability of nearly anyone who can fog a mirror to get a mortgage pushes real estate prices to astronomical levels which often crater when easy money is no longer available and those who have nothing invested in their properties walk away at the first sign of trouble. Permitting no money down mortgages perpetuates what has been a troubling trend of foreclosures.
The Journal reports that there is a bill in the Senate which would eliminate the no down payment programs, but some senators are hopeful it will be able to continue, albeit with tougher provisions. Something must be done, easy money is what has led to the current financial mess. It is bad enough when financial firms take risk and blow themselves up, but it is worse when the government sponsors such poor financial decision-making.
Look Around You
Today's Wall Street Journal's Ahead Of the Tape column state the opinion that speculators have nothing to do with the rising price of oil. The article states that speculators are not hoarding oil and that prices have risen almost in line with non-speculative commodities such as cadmium and rice. Rice is a bad example as there has been much speculation and investigations are underway.
Other commodities, such as most metals, have not risen in line with oil. Also, not all oil speculation is done with supply and demand in mind. The weaker dollar is also attracting currency hedgers.
None of this is unethical or illegal, but it is a fact. Oil bulls consistently espouse the opinion that it is increased demand which is causing the rally in oil prices. There is much truth to this, but the oil bulls disregard ANY other influences to the rising price of oil. This smells like tech, housing and even tulips to us.
Also, oil bulls and the green lobby both deny that increased supply (drilling) will have any real effect on oil prices. This is mathematically impossible, unless speculators keep pushing up the price of oil. More supply should result in lower prices of demand remains constant and should moderate price increases should demand continue to rise. To say it has no effect is to expose one's agenda or lack of intelligence.
We are not saying that oil prices will drop to $30 per barrel due to new supply. We are not saying it will drop to $80 per barrel. However, the THREAT of new supply combined with a stronger dollar has to have a negative effect on oil prices, unless there is manipulation at work.
We look for the Fed to take a hawkish stance against inflation, just as soon as the financial sector is healthy enough. That could be some time on 2009.
One Is The Loneliest Number
Toyota could be lonely at the top in the near future. Current number one automaker, GM is about to engage in a round of rebates designed to increase sales. Higher fuel prices have cut into domestic (truck-reliant) vehicles sales during the past year. GM is, once again, forced to mortgage future sales and potential profit to ensure its survivability or its number one position. One could make the argument that being number one is nit the most important objective at this time, but GM has made staying number one a priority and survival is also on the minds of GM's board of directors.
During this entire oil spike, it has amazed us that car buyers have turned to foreign makes, not because of quality concerns, but because of the perception (which is in many cases false) that they offer better fuel mileage. Buyers have also turned to crossover SUVs which offer only minimal mileage gains over similarly-sized traditional SUVs and often get poorer fuel economy than even larger cars. Perception is reality. We see that every day with investors who purchase bonds and preferreds purely because of their deep discounts.
The Bargain?
Today's Wall Street Journal Credit Markets column discusses the possibility and implications of increased corporate defaults for the Junk Bond market. According to the Journal, Moody's stated that senior junk bond investors could receive an average of 68 cents on the dollar as opposed to the historical average of 87 cents on the dollar.
The reason for the potential decline is that many high-yield-rated companies used loans for financing instead of bonds in recent years. The result is that bondholders have a more subordinate claim on assets than in the past. In our opinion, this means that preferred holders, regardless of structure, could be left out in the cold. Cumulative means nothing in a bankruptcy.
Several FAs have pointed out that preferred investors in the California utilities were made whole and therefore, cumulative preferreds do have a high standing in bankruptcy. Not quite Macgillicudy. ALL bond and preferred holders invested in the California utilities were made whole because of legislation changes which made the companies profitable. Their reorganization plans allowed for this. Preferred holders did not leap frog bondholders and non-cumulative preferred holders were also made whole.
In a more typical bankruptcy, preferred holders, cumulative or non cumulative will receive little if anything in the way of recovery. Banks and bondholders will be entitled to recovery first.
Got to keep the loonies on the path
Are the inmates running the asylum? An article in today's Wall Street Journal indicates that the no money down mortgage is alive and well and is, in some cases, being facilitated by the U.S. government, non-profits and home builders. What is going on here?
Some government officials believe that the no money don mortgage helps the FHA assist first-time home buyers. Home builders like these kinds of mortgages because it attracts buyers. One can almost excuse the FHA due to its stated mission, but is it wise for homebuilders (most whom are troubled) to attract buyers who cannot afford a down payment on the home of their choice. Non-profits may be well intentioned, but due to their specific agenda's care little about the overall effects of no money down financing.
Today's Journal quotes a new home buyer who said she couldn't have purchased her condo without down payment assistance from the seller. She stated: "I was having a hard time just trying to save because I was spending from week to week trying to live."
First off, maybe she shouldn't be purchasing a home. There is no divine right to homeownership. If one is not in the financial position to save any money, it is unlikely that person will be able to weather an unforeseen financial emergency.
Secondly, the ability of nearly anyone who can fog a mirror to get a mortgage pushes real estate prices to astronomical levels which often crater when easy money is no longer available and those who have nothing invested in their properties walk away at the first sign of trouble. Permitting no money down mortgages perpetuates what has been a troubling trend of foreclosures.
The Journal reports that there is a bill in the Senate which would eliminate the no down payment programs, but some senators are hopeful it will be able to continue, albeit with tougher provisions. Something must be done, easy money is what has led to the current financial mess. It is bad enough when financial firms take risk and blow themselves up, but it is worse when the government sponsors such poor financial decision-making.
Look Around You
Today's Wall Street Journal's Ahead Of the Tape column state the opinion that speculators have nothing to do with the rising price of oil. The article states that speculators are not hoarding oil and that prices have risen almost in line with non-speculative commodities such as cadmium and rice. Rice is a bad example as there has been much speculation and investigations are underway.
Other commodities, such as most metals, have not risen in line with oil. Also, not all oil speculation is done with supply and demand in mind. The weaker dollar is also attracting currency hedgers.
None of this is unethical or illegal, but it is a fact. Oil bulls consistently espouse the opinion that it is increased demand which is causing the rally in oil prices. There is much truth to this, but the oil bulls disregard ANY other influences to the rising price of oil. This smells like tech, housing and even tulips to us.
Also, oil bulls and the green lobby both deny that increased supply (drilling) will have any real effect on oil prices. This is mathematically impossible, unless speculators keep pushing up the price of oil. More supply should result in lower prices of demand remains constant and should moderate price increases should demand continue to rise. To say it has no effect is to expose one's agenda or lack of intelligence.
We are not saying that oil prices will drop to $30 per barrel due to new supply. We are not saying it will drop to $80 per barrel. However, the THREAT of new supply combined with a stronger dollar has to have a negative effect on oil prices, unless there is manipulation at work.
We look for the Fed to take a hawkish stance against inflation, just as soon as the financial sector is healthy enough. That could be some time on 2009.
One Is The Loneliest Number
Toyota could be lonely at the top in the near future. Current number one automaker, GM is about to engage in a round of rebates designed to increase sales. Higher fuel prices have cut into domestic (truck-reliant) vehicles sales during the past year. GM is, once again, forced to mortgage future sales and potential profit to ensure its survivability or its number one position. One could make the argument that being number one is nit the most important objective at this time, but GM has made staying number one a priority and survival is also on the minds of GM's board of directors.
During this entire oil spike, it has amazed us that car buyers have turned to foreign makes, not because of quality concerns, but because of the perception (which is in many cases false) that they offer better fuel mileage. Buyers have also turned to crossover SUVs which offer only minimal mileage gains over similarly-sized traditional SUVs and often get poorer fuel economy than even larger cars. Perception is reality. We see that every day with investors who purchase bonds and preferreds purely because of their deep discounts.
The Bargain?
Today's Wall Street Journal Credit Markets column discusses the possibility and implications of increased corporate defaults for the Junk Bond market. According to the Journal, Moody's stated that senior junk bond investors could receive an average of 68 cents on the dollar as opposed to the historical average of 87 cents on the dollar.
The reason for the potential decline is that many high-yield-rated companies used loans for financing instead of bonds in recent years. The result is that bondholders have a more subordinate claim on assets than in the past. In our opinion, this means that preferred holders, regardless of structure, could be left out in the cold. Cumulative means nothing in a bankruptcy.
Several FAs have pointed out that preferred investors in the California utilities were made whole and therefore, cumulative preferreds do have a high standing in bankruptcy. Not quite Macgillicudy. ALL bond and preferred holders invested in the California utilities were made whole because of legislation changes which made the companies profitable. Their reorganization plans allowed for this. Preferred holders did not leap frog bondholders and non-cumulative preferred holders were also made whole.
In a more typical bankruptcy, preferred holders, cumulative or non cumulative will receive little if anything in the way of recovery. Banks and bondholders will be entitled to recovery first.
Tuesday, June 17, 2008
Stupid Is As Stupid Does
I don't suffer fools well. I cannot stand those who shirk responsibility or watch pop culture TV and movies and have the audacity to comment on what is going on within the economy. I am becoming concerned because the GUM (great unwashed masses) are beginning to debate whether the rise in oil prices are due to a weak dollar or speculation. Well duh!!!!
Of course a weaker dollar / loose monetary policy is responsible for rising energy prices. The argument over whether it is the weak dollar or speculation which is responsible for higher energy prices is moronic.
A weak dollar IS causing more speculation in certain commodities. If one owns dollars and needs to spend dollars once invests in vehicles which help to maintain purchasing power. This is why people invest in gold, not because the industrial uses of gold are expected to increase.
Anyone who has access to a Bloomberg terminal can run a chart which indicates the correlation between a weaker dollar and higher oil prices. Run it back 20 years and the relation ship is still there.
Raise rates and you lower oil prices. Unfortunately that will cripple banks. Many were concerned that we are helping to bail out Bear Stearns by committing tax dollars to guarantee $29B of structured asset-backed debt. In actuality, consumers are bailing out the entire financial system at the pump.
Damn those hubristic bastards.
Of course a weaker dollar / loose monetary policy is responsible for rising energy prices. The argument over whether it is the weak dollar or speculation which is responsible for higher energy prices is moronic.
A weak dollar IS causing more speculation in certain commodities. If one owns dollars and needs to spend dollars once invests in vehicles which help to maintain purchasing power. This is why people invest in gold, not because the industrial uses of gold are expected to increase.
Anyone who has access to a Bloomberg terminal can run a chart which indicates the correlation between a weaker dollar and higher oil prices. Run it back 20 years and the relation ship is still there.
Raise rates and you lower oil prices. Unfortunately that will cripple banks. Many were concerned that we are helping to bail out Bear Stearns by committing tax dollars to guarantee $29B of structured asset-backed debt. In actuality, consumers are bailing out the entire financial system at the pump.
Damn those hubristic bastards.
Monday, June 16, 2008
What You Say
Tonight on Kudlow and Co., the panel debated whether or not the Fed should raise rates and whether it would help or hurt the economy. The classical opinion was that by raising rates, consumers will be squeezed further. The other argument (one to which I subscribe) is that, consumers aren't borrowing and banks aren't lending and that by keeping rates low, all that is being accomplished is that the dollar weakens and consumers get squeezed by higher food and energy prices.
It seems that there is a group of people who insist that higher energy prices have nothing to do with the weaker dollar (in spite of all the data which say otherwise). I can't decide whether these people have a political agenda or are just stupid. We hope it is the latter. Bottom line is that, if the dollar strengthens, oil prices will fall, at least to some extent. Let's hope that the powers that be come to their sense soon. Maybe we will even drill for domestic oil. what can I say? I dream big.
It seems that there is a group of people who insist that higher energy prices have nothing to do with the weaker dollar (in spite of all the data which say otherwise). I can't decide whether these people have a political agenda or are just stupid. We hope it is the latter. Bottom line is that, if the dollar strengthens, oil prices will fall, at least to some extent. Let's hope that the powers that be come to their sense soon. Maybe we will even drill for domestic oil. what can I say? I dream big.
Monday, June 9, 2008
Stuck In The Middle With You
Oil prices spiked on Friday following Thursday's ECB decision to leave rates unchanged and comments indicating its next move would be to tighten, poor unemployment numbers and dollar weakening. It is apparent to all but those with severe cases of denial that much of the spike in oil prices is due to speculation on the value of the dollar, Fed policy, U.S. economic performance as well as increased global demand.
The $16.00 two-day rise in the price of oil on 6/5 - 6/6 was clear indication that speculation is drive prices. Either that or six million cars were added to Chinese and Indian roads over night. As I have stated several times in the past, much, if not most, of the rise of oil prices is due to the weaker dollar. This can be proven by charting the relationship.
The good news is that the Fed can fix the problem If the Fed began tightening, the dollar would gain strength and oil prices would stabilize and possibly fall. However, the Fed cannot take this course of action. Why? Any rise of short-term borrowing rates could be harmful or fatal to many U.S. financial institutions. Even the Fed's stimulus programs would be affected.
One needs to ask if Glass-Steagall Act should be reinstated. After all, it was created in 1933 in the wake of the 1929 market crash and failure of the banking system. Maybe if speculation was better controlled the Fed would not have had to step in and prevent a failure to the financial system and a Bear Stearns implosion would be more isolated. Maybe Mr. Bernanke should lead the charge. After all, he is a student of the Depression.
The $16.00 two-day rise in the price of oil on 6/5 - 6/6 was clear indication that speculation is drive prices. Either that or six million cars were added to Chinese and Indian roads over night. As I have stated several times in the past, much, if not most, of the rise of oil prices is due to the weaker dollar. This can be proven by charting the relationship.
The good news is that the Fed can fix the problem If the Fed began tightening, the dollar would gain strength and oil prices would stabilize and possibly fall. However, the Fed cannot take this course of action. Why? Any rise of short-term borrowing rates could be harmful or fatal to many U.S. financial institutions. Even the Fed's stimulus programs would be affected.
One needs to ask if Glass-Steagall Act should be reinstated. After all, it was created in 1933 in the wake of the 1929 market crash and failure of the banking system. Maybe if speculation was better controlled the Fed would not have had to step in and prevent a failure to the financial system and a Bear Stearns implosion would be more isolated. Maybe Mr. Bernanke should lead the charge. After all, he is a student of the Depression.
Thursday, June 5, 2008
Don't Stop Believing
Several postings ago I cited speculation and a weaker dollar were at least partially, if not mostly responsible for the recent spike in oil prices. Many colleagues, pundits, critics, and even treasury secretary Hank Paulson dismissed the idea that the weaker dollar was having an effect on oil prices. Since that time, Fed Chairman Ben Bernanke expressed concern that the weaker dollar was causing food and energy inflation and today ECB President Jean-Claude Trichet stated that the ECB will keep their benchmark lending rate at 4.00% and the ECB could raise rates as soon as next month.
The reaction was not surprising to me. Following Monsieur Trichet's comments the euro rallied sharply versus the dollar and oil rallied by $6.00 per barrel. Next time someone is stupid or dishonest enough to tell you that today's oil prices are purely a function of supply in demand, laugh in their face and walk away.
The reaction was not surprising to me. Following Monsieur Trichet's comments the euro rallied sharply versus the dollar and oil rallied by $6.00 per barrel. Next time someone is stupid or dishonest enough to tell you that today's oil prices are purely a function of supply in demand, laugh in their face and walk away.
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