Empty Storefronts Repurposed

If you've been following the financial media, you know that the commercial real estate sector is in trouble. Its basically following the trajectory that the residential real estate market did. Although, to be fair, the commercial real estate mortgage backed securities (MBS) market is much smaller than the residential MBS market is. Regardless, it looks like banks are poised to take another hit thanks to loan defaults. Of course, this all translates into empty storefronts so communities everywhere end up taking a hit.

Blogger Matthew Yglesias wonders why down markets don't result in unused urban storefronts being rented. He concludes that regulation might be partly responsible. Megan McArdle over at the Atlantic responds to Yglesias's post. Interestingly, she mentions a few reasons why malls might fare better than urban storefronts in this recession.

How are some empty stores being repurposed? Some are being used as street-front ad space. Others are being transformed into churches. Pretty interesting stuff.

How is retail doing in your community? Noticed any major changes or transformations?

Is the U.S. Making a Profit Off of it's Bailouts?: Media Spin and Reality

Today, the New York Times presents us a lovely piece of journalism entitled "As Banks Repay Bailout Money, U.S. Sees a Profit," written by Zachery Kouwe. What an optimistic title! Then we read the first two paragraphs:

Nearly a year after the federal rescue of the nation’s biggest banks, taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.

The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.

Wow! That's great, right? Then the "buts" begin ....

The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage finance companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.

So, this article reports that the U.S. has earned about $4 Billion in profit from the TARP program. At the same time, the trillions of dollars in other bail-outs, the stimulus program, and the rest of the TARP program have yet to produce much of any kind of positive return. In other words, the overall picture is still negative but you wouldn't be able to deduce that based on the headline and tone of this article.

The naked capitalism blog calls out the New York Times (and the Financial Times, which published a similar story) on their transparent attempts at spin.

In a simply remarkable coincidence of timing, the New York Time running a story with the very same message, namely that bailouts are good for taxpayers because the Treasury has made money on the TARP.

If you believe that, I have a bridge in Brooklyn I’d like to sell you. The fact that we have such patent garbage running as a front page New York Times story says either the reporter and his editors lack the ability to think critically (or find sources who could do that for them) or that we have a controlled press. Given that subscriber-driven Bloomberg has even fallen in line, I am inclined to the latter view, but I am still curious as to how this has been achieved. Is this the price of access journalism, or is something more pernicious at work?

Naked capitalism refutes the idea that the TARP program is transforming into a profitable venture for the federal government:

A quick but not conclusive search suggests that only a small portion of the TARP has been retired, so it is wildly premature to declare victory.

In fact, another source looked at the TARP as of June and estimated that it had lost $148 billion, and had lowered loss total as a result of the repayments. Now bank stocks have rallied since then, but the biggest contributors to the red ink, namely AIG and Citigroup, are not in any better shape fundamentally than they were then. Indeed, the fact that new AIG CEO Robert Benmosche has in a remarkable show of hubris, effectively told the US taxpayer to stuff it, AIG has the dough and is in no particular hurry to return it, nor does it care what the public or Treasury wants, its demands are unreasonable. I wouldn’t hold my breath about having the loans repaid.

I don't want to leech any more of naked capitalism's post, so I encourage you to go over there and read for yourself, there is much more. Another, similar post from earlier in the day can be found by clicking here.

Debt Deflation and False Dawns

There's a debate raging in the financial world right now over whether the biggest threat to the American economy's health is deflation or inflation.

Off to the top left of the screen you'll see a poll I put up asking that very question. Please vote, if you feel inclined.

Today, somebody linked me to a rather old article from January of this year. Its an interview of economist Dr. Lacy Hunt by the Business Spectator publication from Australia. You can find the article here.

Despite the fact that it was published over half a year ago, I felt strongly compelled to share this article with my readers because it presents a coherent, cogent argument that not only supports the case for deflation but, if true, puts the broader economic picture into sharper focus.

Dr. Hunt essentially argues that:

1. We are entering a period of deflation. Debt deflation to be exact. Other historical instances of debt deflation include (a) the U.S. during the 1870s-1880s, (b) the global Great Depression of the 1930s, and (c) Japan, beginning in 1988 and continuing until the present.

2. What pulled the U.S. out of its debt deflation during the Great Depression was its participation in World War II and not President Roosevelt's New Deal program. Furthermore, the Japanese have also run stimulus programs funded by large deficits over the past two decades which have led to minor, cyclical growth but which have been unable to shake off the stronger, overall deflationary trend.

3. Debt deflation lasts a long time. The deflationary period beginning after 1873 in the U.S. lasted approximately 20 years. The Japanese debt deflation that begin in 1988 is ongoing until today. As a side note, her argument is corroborated by a report from Friday which states that Japan experienced record year-over-year deflation of 2.2% in July. Click here to read a report on this development from Bloomberg. Hunt comments that in her view it is quite possible that we're entering a 15-year deflationary period right now.

4. The markets are very susceptible to what she calls "false dawns." I'll let her explain it:

Well, one of the things that has happened in these debt deflations is you get a number of false dawns. People believe that the normal business cycle is going to take control and you're going to get a cyclical recovery and the model that soon prevails is that you get three to 10 years of expansion. You have one year, maybe a year and a half of a recession or nasty economic conditions, but after a year and a half at most, the economy then has another expansion for 3 to 10 years.

When we have these very rare debt bubbles occurring at these long irregular intervals, the normal business cycle model doesn't really apply. We do get some false dawns. Some intermittent cyclical recoveries but the unwinding of the debt process proves to be very very long and difficult. One of the reasons for that is that borrowers don't know anything about paying back loans in harder times, which is what's now beginning to occur and as a consequence there is a major behavioural shift or there has been historically in which consumers decide to live inside of their means as opposed to living outside of their means and normally the saving rate goes up for a long time.

Keep in mind that this was published on January 30th of this year, when the Dow Jones Industrial Average closed at 8,000.86 points. Today (August 30th, 2009) the DJIA closed at 9544.20 points[1]. This backs up the argument I and others have made that the current rally is unsustainable. Nouriel Roubini refers to it as a "dead cat bounce" while Dr. Hunt refers to it as a "false dawn," but the premise is the same.

5. The government stimulus program is not working and actually may be making things worse. She states:

The most recent academic research that I have seen, published in 2008, indicates that the multiplier on government expenditure is just close to zero. If the government spends an additional dollar it has to fund that dollar either by raising taxes on the private sector or borrowing funds in the capital markets that would have gone to the private sector. Government spending, the government sector in the US, the productivity is at best zero and perhaps slightly negative, so when we enlarge the government sector and shrink the private sector we reduce the growth, potentiality, of the US economy. We shrink the pie and we make things worse off.

She thinks the TARP program could have gone another, alternative way:

The alternative, which the Japanese would have done and the better way to go, is to use the treasury borrowing capacity to protect the depositors and the customers of the banks and the insurance companies and perhaps extend unemployment benefits for their employees that are laid off. Zombie-like institutions intact with wholesale federal dollars, borrowed federal dollars – those institutions are really not able to grow or contribute to the economy. If instead we had protected the savers and the depositors, then institutions would have failed, but the healthy banks and insurance companies would have taken over the business of the institutions that made the mistakes and then we would have a growth trajectory going forward. So it's quite possible that the actions that we've taken and cost hundred of billions dollars, hundreds of billions of dollars have actually not helped the situation and may have had severe unintended negative consequences.

6. The U.S. trade deficit is narrowing and may be eliminated in the next few years.

She also has some advice for investors, but I'll let you visit the site and read for yourself. Overall, I thought Dr. Hunt presented one of the most compelling arguments in favor of deflation. She managed to fit her take on the current crisis into a coherent historical context and made some predictions that are strongly supported by the current financial data available.

Sources:

1: http://finance.yahoo.com/q/hp?s=^DJI&a=00&b=30&c=2009&d=07&e=30&f=2009&g=d

Desperate Investors Embrace Risky Moves

The other day, I wrote about economist Nouriel Roubini and the on-going stock market rally. I opined that I thought the rally was the result of investors putting aside worries about risk and making short-term investments in the stock market because its one of the few investments out there that offers the prospect of any kind of considerable returns. My overall point was that, because of this fact, the stock market should not be taken as an accurate gauge of the U.S.'s economic health. Furthermore, we're likely to see considerable volatility in the markets because of this phenomenon.

It turns out that the Los Angeles Times has published an article that pretty much directly echoes everything I said. You can read the article here.

I won't paste the whole article, but here are some important excerpts to give you an idea of what I'm talking about.

First, the opening paragraphs:

Stung by punishing losses in the bear market, some individual investors are souring on traditional buy-and-hold investing in favor of aggressive trading aimed at scoring big gains. ¶ Trading at online brokerages has soared in recent months as investors have tried to capitalize on rising securities markets. But individual investors increasingly are embracing strategies that carry outsized risks. ¶ In some cases, for example, investors have ventured into a relatively new type of investment product designed to magnify the movement of the underlying markets. That can sometimes yield big gains if investors bet correctly but bruising losses if they don't. ¶ To critics, the push into aggressive trading is the equivalent of doubling down at a casino to recoup earlier losses. ¶ "It would be a terrible tragedy if people try to recover from the devastation of the financial crisis by creating even more devastation in their personal investment accounts by taking on risks they don't understand and can't afford," said Barbara Roper, director of investor protection for the Consumer Federation of America.

The "relatively new type of investment product designed to magnify the movement of the underlying markets" that they're referring to are ETFs or Exchange-traded Funds. The article continues:

Susan York was fed up with the dismal performance of her 401(k) retirement account. Then her husband saw a Sunday morning infomercial in January touting the benefits of trading options, which give an investor the right to buy or sell stocks and other securities at pre-determined prices.

The 50-year-old from Naples, Fla., had limited investment knowledge but attended several seminars before starting to trade in May. So far, York said, she's up an average of 40% a month and is trading full time.

"It's the best job I've ever had, not just for the enjoyment but from the compensation standpoint," said York, who previously sold telecom equipment. "I've replaced a significant six-figure income."

Trading activity at online brokerages jumped in the second quarter as the stock market began rebounding in early March from its deep sell-off. Compared with a year earlier, activity was up 28% at E-Trade Financial Corp. and 36% at TD Ameritrade Holding Corp.

The article continues to state that apparently some ETFs are being sued by investors for being misleading. Overall, a pretty interesting article that makes a lot of things clearer. I think this article ultimately corroborates my assesment that the stock market is not an accurate measurement of the real American economy's health at the moment.

What I'm Reading

"Ultimate Crisis Still Coming"
Analyst Marc Faber believes that the ongoing rally is the result of excess liquidity pumped into the economy by central banks. He predicts a year to 18 months of market rally followed by a "ultimate" crisis that will "clean" the system. He advocates firing half of global government workers as one radical solution.

"If you pump money into the system and you create large fiscal deficits, you create volatility," Faber, author of the Gloom, Boom and Doom Report, told CNBC in remarks reported on its website.

"We've seen an intermediate low in March, we'll rally for a year or so or maybe 18 months -- the ultimate crisis will happen much later, and the ultimate crisis would clean the system," he added.

Faber, who did not forecast a precise time for that crisis, told CNBC that firing half the government workers in the world would be one way of dealing with the crisis.

"If you shift government activity to the private sector the economy becomes more dynamic," Faber said.

More Bank Failures Coming?
An analyst by the name of Richard Bove at Rochdale Securities (whom CNBC identifies as a "prominent banking analyst") is predicting a possible 150 to 200 further bank failures in the U.S. 81 banks have already failed in 2009.

Doubts About Dollar Continue
There is nothing new in this article. It simple summarizes why many doubt the stability and value of the dollar. It does mention that Pimco and Berkshire Hathaway Chairman Warren Buffet have come out as high-profile critics of the ballooning debt and how it could lead to negative outcomes for the U.S. dollar. I'm mostly interested in this article because it caps a week where we've seen a ton of articles from the financial media on the value of the dollar, but none with any real news or any "meat" to them. I find that rather curious but I can't explain it.

Senator Warns of Inflaton
Senator Chuck Grassley (R-Iowa) is warning about the possibility of 1980s style inflation, which hit 13.5%. I think its quite possible (maybe even likely) that his prediction will come true. In fact, he might low-balling it a bit at 13.5%. However, I think his public statements are a bad thing, a very bad thing. Grassley doesn't really offer anything new in his analysis and theres nothing in his background that makes him particularly competent to make such a prediction. What we're seeing is the further politicization of fiscal policy and the threat of inflation. When things get politicized, they get emotional and they get polarized and it makes it that much harder to get some actual, positive change for the better since everything becomes part of a political battle between personalities.

Well, thats all for now. Stay tuned for more ...

Nouriel Roubini and the Future of the Stock Market

Most readers are probably familiar with Nouriel Roubini. Roubini was one of the few academic/establishment economists who predicted the credit crisis and the ongoing recession. Liberals especially embraced Roubini because he advocated for strong Keynesian measures to prevent the economy from going into freefall. He's emerged as one of the most influential economists in the world right now, right along with Paul Krugman. One fact that some of you might not know is that, under the Clinton presidency, Roubini was a senior adviser to Timothy Geithner(who is now Treasury Secretary under President Obama).

Roubini has warned his readers that the ongoing stock market rally has a strong possibility of fizzling out and ultimately being nothing more than a "dead cat bounce." Quite simply, the optimism in the market doesn't jive with the weak expectations for earnings growth. Today, Bloomberg has published an article presenting the viewpoint of some Roubini-skeptics. Apparently, a lot of investors genuinely believe we've entered a bull market and they cast doubt upon Roubini's warnings. In fact, according to Bloomberg, some investors might have missed out on "the biggest rally since the 1930s" because they followed Roubini's advice.

When it comes to the stock market's ongong rally, I agree with Roubini. There's a lot of exuberance around the stock market but it's definitely not based on the 2009 and 2010 projections for the U.S. economy, which are still mostly "doom and gloom." Despite all the talk about recovery and "green shoots," our political and financial leaders still haven't pointed to one industry or one economic sector that they expect to significantly grow and be able to drive a recovery over the next few years.

However, the part of the Bloomberg article that I found the most interesting was the following:

Roubini has “done a very good job on the economy,” Birinyi said in an interview Aug. 24. “Our approach is to try to understand the market and not try to do much more than that.”

Laszlo Birinyi is an investment manager (unlike Roubini, who is an analyst and a scholar at New York University) who also correctly predicted the economic collapse, in 2007 (Roubini warned his audience about troubles in the housing market as early as 2005). The article further states:

“Both of them just have a pretty deep understanding of the history of economic and business cycles,” said Eric Teal, who oversees $5 billion as chief investment officer at First Citizens Bank in Raleigh, North Carolina. “Roubini has just had more of an academic background, whereas Birinyi has been much more in the spotlight managing money and working in capital markets.”

I thought these excerpts were quite telling about so much.

What comes through is that investors perceive a divide between "the economy" and "the markets." To some degree, this explains why so many investors were blindsided by the recession. Investors were so focused on understanding the movements and dynamics of the market that they were unable to see the flawed and unsustainable foundations of the economy on which that market was based. Apparently some things dont change.

At the same time, these investors aren't completely wrong in the way they see things. What happens when a company experiencing distress lays off a significant percentage of its workforce? On the one hand, the American economy as a whole suffers because it adds to unemployment and lowers consumption. On the other hand, the economic situaton of that company might genuinely be better because it has reduced costs and has probably come closer to returning to profitability. When this happens on a mass scale, as is happening now, a kind of decoupling between the economy and the markets happens. The market comes to only represent a certain slice of the American economy. Much of the real economy is no longer reflected by the status of the market. The problem is that the media still tries to present the stock market as if it were an accurate measurement of the health of the real economy, which it isn't.

Finally, these comments show just how desperate investors are right now. A small rise in the Dow Jones Industrial Average would have been understandable considering the national economy did just avoid total meltdown. But a small rise isn't the case. The reality is that we're in the midst of one of the steepest rallies since the 1930s, as Bloomberg points out. There are very few safe havens for investors out there. So, when investors saw that the stock market was rallying they were willing to ignore the obvious signs of risk out there (including overt warnings from Roubini and others like him) and they jumped in with the hope of making at least some returns. The desperation of investors tells us more about the state of the economy than the various indices do, in my opinion. We can also see that, as long as there serious doubts about the economy, we can expect some serious volatility in the markets. As a recent commentary by me points out, the Great Depression bore witness to some of the biggest rallies in history.

So when we see something incredibly contradictory like what we see today: Roubini(who is probably the most influential economist in the United States) voicing major concerns over the future of the economy while the stock market rallies and institutional investors declare a bull market ... I think the only thing we can be sure about is that the recession is still far from over and some severely bumpy road (to say the least) still lies ahead.

Rhode Island To Close State Govt. For 12 Days

In a previous post, I mentioned that state and municipal governments were facing large deficits across the United States. In order to balance these budgets, many states and municipalities are going to either lay people off, cut hours, cut pay or employ furloughs to cut costs.

Today, the Associated Press reports on an extreme example of this phenomenon.

PROVIDENCE, R.I. – Rhode Island will shut down its state government for 12 days and trim millions of dollars in funding for local governments under a plan Gov. Don Carcieri proposed Monday to balance a budget hammered by surging unemployment and plummeting tax revenue.

The shutdown would force 81 percent of the roughly 13,550-member state work force, excluding its college system, to stay home a dozen days without pay before the start of the new fiscal year in July.

The closures come as the worst recession in decades has eliminated hundreds of millions of dollars in tax collections and pushed unemployment to 12.7 percent, the second-highest jobless rate in the nation behind Michigan.

This past decade, the government sector has been one of the few economic sectors to exhibit strong growth. This phenomenon will severely cut into that. This will further reduce consumption since these workers are being forced to take time off without pay. In other instances, states will surely lay people off and add to the unemployment rolls.

Next year we could see an even greater reduction in tax revenues and more budget cuts. If Rhode Island is shutting down state government for 12 days this year, where will it be next year?