The fall and financial destruction of 2008 launched a brand-new era for the credit markets. An era marked by government intervention and outright manipulation all committed in broad daylight under the protection of financial apocalyptic prophecies. Our self-styled financial superheroes (Treasury Secretary Geithner and Fed Chairman Ben “Helicopter” Bernanke), wield their collective financial imagination and money printing press like Thor’s hammer on any and all areas of the credit markets they deem worthy. Think of this behavior, if you will, as a massive financial game of ‘Whack a Mole’: When a certain sector of the credit markets pops its head out of its hole and refuses to behave, Batman and Robin fly in on a Mil V-12 and pummel accordingly. We can rail against this free market destroying and dangerous ethic, or we can take advantage of this obscene ritual and profit.

I, for one, choose profit over catharsis and along that vein offer you the following illustration of credit market evolution by our very own Credit Guru, MJ:

Near the height of the credit crisis Capital One announced that were buying back their ABS Auto bonds. They indicated that the returns available in the secondary market exceeded the returns they could earn by originating new car loans. They continued to buy back bonds in the secondary market until secondary market prices increased to the point that it became more profitable to originate new car loans rather than simply buy secondary market loans. Once the economics favored originating new car loans over buying older vintage ABS bonds….credit flowed back into the car financing business…… and car sales began to increase as pent up demand was unleashed.

The recovery in the Auto Finance market and its ability to attract investment dollars has caused Auto finance credit to materially loosen for even non-prime borrowers. The power of this trend manifested itself in GM’s decision to acquire AmeriCredit.

A similar trend materialized in the airplane leasing business. As the credit markets recovered, bonds issued by airplane leasing companies rebounded strongly. Intermediate ILFC bonds were trading in the mid-50s in February 2009 but are now trading strongly through par. Similar to the Auto Finance business, once pre-credit crisis airplane leasing bonds approached par airplane leasing companies were quick to tap the market for new financing. This new financing allowed them to order new planes and pay for planes already on order. As we have stated numerous times since the spring 2009, the reestablishment of an airplane leasing credit market has facilitated a pick-up in aircraft purchasing that we believed would benefit the entire manufacturing industry.

This same basic premise also seems to be working its way through other structured credit asset classes…although it is and has occurred at different paces. In our opinion, CMBS is in the middle of this same cycle. The rally in many pre-crisis CMBS deals and the issuing of new deals will continue to accelerate and deal spreads will tighten as investors use leverage to build their portfolio size. Current 8x-10x leverage will increase and capital raises will provide managers with a great deal of buying power. The expected increase in leverage availability and the high rates of return still available in this market will allow it to continue to attract investment. As demand for CMBS investments increase the market will once again begin to finance an increase in commercial building…..

The RMBS sector is following the CMBS sector’s lead. Although we believe that government driven uncertainty regarding GSE shrinkage and increase regulatory risk is slowing the RMBS sector’s recovery, we do not believe that there is anything in the market at this point that will actually reverse the RMBS Sector’s recovery. The aggressive leveraging of RMBS securities in Hedge Funds, REITS, and other investment vehicles is in the process of driving RMBS prices higher. We expect that the demand for RMBS paper is going to materially grow and outstrip the amount of secondary market bonds readily available as the year progresses. This is one of the reasons the FED is dumping their bonds. By the end of this year we expect a sizable increase in non-GSE related RMBS debt that will begin the process of materially loosening homebuyer credit. This would lead to an increase in residential construction work in 2012 as the loosening facilitates the release of pent up housing demand.

Tags: ABS bonds, auto finance, ben bernanke, cmbs, Credit Guru MJ, credit markets, Fed, Fed Chairman, Geithner, GSE, REIT, rmbs, Thor's Hammer, treasury secretary

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Perspective: US$ vs. Gold

Tags: ben bernanke, debt-ceiling, economy, GDP, Geithner, gold, gold prices, obama, Q.E., Quantitative Easing, U. S. economy, US$

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The following is from www.zerohedge.com.  This piece is so profound that a reprint is required:

The SEC passes regulation that only STRENGTHENS the case to own Gold

Suspending Money Market Redemptions Is Now Legal; SEC Approves New Money Market Regulation In 4-1 Vote…

…Well, in a nearly unanimous vote, Money Market Funds now have the ability to suspend redemptions, courtesy of the SEC’s just passed 4-1 vote. This explains the negative rate on bills: at this point, should there be another meltdown, money market investors will not, repeat not, be able to withdraw their money purely on the whim of Mary Schapiro. As the SEC noted: “We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares.” Too bad investors’ hardships considerations ended up being completely irrelevant.

Anyone who sees this regulation and feels safe leaving their money in money market funds needs to have their head examined. The “intent” is to prevent a “run” on money market funds when the next crisis hits. Essentially the passage of that regulation signals the high probability of such a crisis happening.

As alluded to in the post, the rate on 1-month T-bills has gone negative today. Think about what this means. When a big investor is willing to invest short term money and have returned less money than was invested just 30 days ago, it tells us that the investor is more concerned about getting his money back than he is about making money on his money. The investor is essentially paying a small fee to insure that his cash is returned with little loss (30-day T-bills would be considered riskless since the Gov’t can print money to honor the claim). Think about the signal from big investors that is being given here about the perception of systemic risk and the probability of systemic failure. The rate on 30-day bills went negative for quite some time before the collapse of Lehman and AIG.

This phenomenon only strengthens the case that investors should be putting as much as they can into gold and silver as vehicles for protecting and preserving wealth. When you own gold, you are not subjected to, and victimized by, the bad decisions and moral hazards being implemented by our policymakers, many of whom are puppets for the big banks who fund their positions of leadership (see today’s Congressional inquisition of Geithner and Paulson). When you own physical gold in your own possession (or a trusted custodian), your investment does not have any risk of counterparty claim AND you have no Government/SEC restrictions placed on your investment, like the SEC regulation just passed.

I will end with a quote from none other than the king of fiat money, Alan Greenspan, who said on September 9th, 2009: “gold still holds reign over the financial system as the ultimate source of payment.” Keep this in mind when you get your next investment statement from your broker or advisor.

As Gary and I discuss this issue another thought occurs that bares scrutiny.  All are aware of the massive debt load this country sags under.  The Fed has made it clear rates will remain low for an extended period.  However, other methods are required to support the Treasury bond market and effectively keep rates from rising when worldwide ability to support said debt becomes increasingly dubious.  We pose the question:  Are the rule changes on the $3+trillion money market business designed to force conservative money directly into treasuries? Will we see in details of future treasury auctions an increase in the amount purchased by “households” ?

The answers to these questions are unpleasant to ponder and only time will reveal the secrets.  While your mind churns, read the next story and see how it fits into the puzzle.

SEC says more changes for money-market funds – WSJ

WSJ reports money-market funds could be forced to pay out less interest under new federal rules designed to make them sturdier. With memories still raw from the 2008 meltdown of Reserve Primary Fund, the SEC released rules on Wednesday that require funds to hold more liquid and higher-quality assets and disclose the value of their assets per share more frequently. The trade-off: These safeguards also will put pressure on yields that are already near zero. The changes likely will reduce yields by about 0.10 percentage point, said Pete Crane, president of Crane Data. This isn’t good news for money-fund sponsors already suffering from redemptions because of their low rates. Investors pulled about $540 billion out of money-market mutual funds last year, bringing assets to $3.3 trillion, according to Crane.

Tags: Fed, Geithner, gold, money market funds, SEC

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The volatility of precious metals prices will continue to astound. For those requiring a courage boost, I offer the following information as succor…

The Precious Metals market is minuscule - Matterhorn Asset Management
The graph below shows how small the gold and silver industries and markets are in relation to major US corporations and to total world financial assets. The market capitalisation of the silver industry is only $ 9 billion and of the gold industry $ 200 B whilst Microsoft is valued at $250 B and Exxon 350 B.

Both the silver and gold industries as well as the physical markets are so small that any increase in demand is likely to drive prices very substantially higher.

Zerohedge further exposes the BLS Friday jobs report as a worthless…

Even as the BLS and the administration are trying to cover up the real state of unemployment affairs using assorted semantic gimmicks of just what it means to be unemployed, and as companies provide adjusted EPS numbers, while actual earnings continue to collapse, the true barometer of spending, provided by the Financial Management Service, tax withholdings (net of refunds), continues to paint the truest picture of just what is really happening with both America’s consumer and the corporate world….

…On a rolling 12 month basis, individual tax withheld has dropped by nearly 8% YoY, from $1.42 trillion to $1.31 trillion, while company witholdings are down a whalloping 64%, from $274 billion to just under $100 billion! Read More…

Of course, the Obama administration is aware of the true nature of the unemployment problem…

WASHINGTON – President Barack Obama called for a major new burst of federal spending Tuesday, perhaps $150 billion or more, aiming to jolt the wobbly economy into a stronger recovery and reduce painfully persistent double-digit unemployment. Read More…

Geithner said to be seeking TARP extension until next October -

Bloomberg.com reports Treasury Secretary Timothy Geithner plans to tell Congress that the Obama administration will extend the $700 billion financial-rescue program until next October, according to people familiar with the matter. While the Troubled Asset Relief Program expires on Dec. 31, Geithner can extend it by notifying Congress. A letter notifying Congress of the extension could come as soon as today, said the people, who declined to be identified. Andrew Williams, a Treasury Department spokesman, declined to comment. The TARP, passed in October 2008 to prevent a collapse of the financial system, has drawn criticism from Congressional opponents of taxpayer-funded bailouts of banks including Citigroup Inc. The Obama administration, preparing the ground for an extension, has emphasized that the program may also be used to aid homeowners and small companies.

Both actions above are US$ bearish, precious metals bullish. Add to the mix the recent zero-rate U.S. Treasury auction and you can see why our Gold and Silver investment thesis remains intact…

U.S. Treasury zero-rate auction matches record low
WASHINGTON, Dec 8 (Reuters) – The 0.000 percent high yield on the U.S. Treasury’s four-week bill auction on Tuesday matches the lowest on record for the security, the Treasury’s Bureau of the Public Debt said.

The Treasury’s auction of $29 billion in four-week bills at a strong 5.33 bid-to-cover ratio marks only the fourth time that the security was sold at a zero rate. The other three zero-rate auctions occurred in December 2008, near the height of the financial crisis.

Tags: Geithner, gold, jobs, obama, precious metals, silver, U.S. treasury, US$

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More economic numbers out this morning that suggest a continuation of the status quo.

The Fed can point to the PPI numbers and pretend there is no inflation…

September Core PPI Y/Y +1.8% vs +2.0% consensus, prior +2.3%

September PPI Y/Y -4.8% vs -4.3% consensus

…So rates can remain low to help the listless housing market…

September Housing Starts 590K vs 610K consensus, prior revised to 587K from 598K

September Building Permits 573K vs 595K consensus, prior revised to 580K from 579K

Somehow, all this data results in a U.S.$ rally, T-bond advance (rate decline) and an equity market sell off. I would expect this counter trend move to be short lived. In fact, there have been some developments regarding the U.S.$ that should concern any U.S. $ optimist.

BEIJING, October 14 (RIA Novosti) – Russia is ready to consider using the Russian and Chinese national currencies instead of the dollar in bilateral oil and gas dealings, Prime Minister Vladimir Putin said on Wednesday.The premier, currently on a visit to Beijing, said a final decision on the issue can only be made after a thorough expert analysis.”Yesterday, energy companies, in particular Gazprom, raised the question of using the national currency. We are ready to examine the possibility of selling energy resources for rubles, but our Chinese partners need rubles for that. We are also ready to sell for yuans,” Putin said. MORE…

A possible accelerant about to be poured onto the pile of burning U.S.$s may have a UK label. The real estate market in the UK appears to be heating up. Prices for both residential and commercial properties in London are hitting records. If this recovery turns into a trend that moves across the channel to the rest of Western Europe then Ben and Pinocchio could have a real problem.

The U.S. $ carry trade will gain steam if a European economic recovery/inflation outpaces the U.S. and leads to rate increases much like in Austraila (see Oct. 7th post). A lagging real estate market here in the U.S. will make it difficult for Ben to raise rates. Meanwhile, Pinocchio (Geithner) will continue to express the desire for a strong $ as his nose grows…

London Agents ‘Sold Out’ as Home Asking Prices Jump to Record Oct. 19 (Bloomberg) — London home sellers raised asking prices to a record high this month and led gains across the U.K. as the shortage of properties for sale intensified, Rightmove Plc said. MORE…

UK property undergoes dramatic recovery - FT
FT reports the UK commercial property market delivered the highest monthly price growth for more than three years in September, capping a remarkable comeback for a sector that looked to have been wiped out only a matter of months ago. Investors are now chasing commercial property and some are complaining that the market has become too hot again. The switch in sentiment has been tangible as investors look to take advantage of a slump that wiped off about 45% from prices from the peak in 2007 by the beginning of the summer. The recovery has been building since, with IPD, the benchmark index, rising 1.1% for September, the highest since June 2006

Tags: China, commercial real estate, Geithner, Inflation, ppi, renewable energy, residential real estate, Russia, UK

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Tags: alcoa, australia's central bank, commercial real estate, Fed, Geithner, hyperinflation, Inflation, obama, stagflation, Stimulus, US$

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Earlier this week, after wrestling with the spate of painful economic news provided by major media, I recognized that I had no immediate control over any of the massive economic concerns. The stock market zigged when I hoped it would zag. Unemployment numbers, often reported differently, moved at different paces in the undesirable direction. Our federal deficit grew, which increased our individual debt responsibility. The problems were not confined by the pages of the newspapers. When I peered through my office window I saw quality real-estate projects continuing to sit lifeless because they lacked funding. After a few moments of reflection, I recognized that I, and certainly the majority of us, am being forcibly weighed down by all of the negative. Instead of dwelling on the uncontrollable, we should be manifesting the positive by taking hold of the reins on those things in which we can have significant influence.

I decided to start anew with more refreshing thoughts. So, I turned to a medium in which I had some control over the information that was presented to me: Google. Two main pages topped the list when I searched for the words “Economy: We Are the Answer.” The first was an informal Yahoo Answer Board on which the following question was raised: “Is there hope for the American economy or should we just drastically change the way we live?” The user went on to define “drastically change” by giving up our private houses and cars. The second most-popular page that appeared was BarackObama.com, which suggests no one within Google’s reach really believes we the people have the capacity to be the answer to our economic problems. According to my Google search, the answer either rests in the hands of President Obama or we will all be forced to live in communal frat houses without automobiles.

When our economy is running smoothly, we all welcome the opportunities to be part of a do-it-yourself world. We bag our own groceries, scan our own documents, rent our own movies and print our own boarding passes. On a weekly basis, we all most likely take it upon ourselves to deposit, track, clean, swipe, dry, spray, refill, bus, organize, pour, dispense and scan in the presence of other do-it-yourselfers in the vast public. As long as the tasks are minimal and the goal is clearly in view, we are encouraged to do everything ourselves. The responsibilities we used to let others handle, we now do ourselves (I cooked my own meal at Melting Pot earlier in the month). About half of the times I visit a gas station, there is no reason for an attendant to be present—unless I am in Oregon or New Jersey, where state officials prohibit me from pumping my own gas. But, when an issue has options that are more complex than selecting diesel or regular, our individual accountability takes a vacation. Why do we turn our focus to other superpowers to take control and eliminate ourselves from the equation?

The Problem is Passivity                               

This economic downturn is nothing more than a collection of intertwined problems. Although financially painful and physically overwhelming, there is no reason for any of us to hide underneath our desks and wait for the shaking to end. Think about the steps we all take when trying to overcome a timely problem—for an example, a clogged drain. We take a short period of time to analyze the situation. We look at all the factors involved and ask ourselves crucial questions: Is the water draining at all? Is the clog causing the pipes to leak? How severe is the leak? Is it causing immediate damage? Next, inevitably, it is human instinct to search for the quickest fix. We switch on the garbage disposal and rub our lucky rabbit’s foot. When we are forced to take real action we must recognize the weapons we have to combat the problem (a plunger, a drain snake, Drain-O). After we extinguish our resources, we then consult the knowledge of an expert. 

Now consider the enormity of our current economic struggles. The formula for dealing with the problem is much more complex, but it should still follow the basic fundamentals. Why then have droves of investors been complacent to listen to long-winded “experts” before analyzing their situation and deducing what it is that they can do for themselves? The formula is flip-flopped when we let ourselves believe that any given problem is too big or too complex. Remember the old adage, “We can only eat an elephant one bite at a time”? Many of the intricacies of this recession are out of our control, but the sooner we take control over the issues we can influence, the sooner the complex problems begin to untangle.

If the severity of the problem is directly proportionate to the amount of time we take to analyze it, then we only need a brief moment to stare into a clogged drain. In that same vein, our economic crisis is much more complex and has required a longer period for analysis. I argue we have passed this stage of the process and action is required now. This summer brought about a number of signs that suggest we are now slogging around somewhere near the bottom. With home-improvement projects, summer vacations and outdoor entertainment, consumers typically spend more in the summer months. We are now entering what is destined to be a difficult autumn. Unemployment will continue to strain on families, foreclosures will mount and consumers will tighten the belts they let momentarily loosen over the summer.

On the other hand, as the leaves turn and nature gets stripped of its color, a buckled economy will continue to present opportunities for us to take action. It is time for all of us to stop viewing ourselves as helpless observers and again consider ourselves part of the equation. In some ways we already are important variables, but we rely on the inadvertent action we take to be sufficient. How many times have you heard an angry citizen blurt out something along the lines of “I do my part, I’m a taxpayer”? The somewhat-passive action of paying taxes funds many integral economic systems in which our country balances itself. Just as we hire plumbers to help unclog our drains and keep them running smoothly we elect (read “hire”) officials to help unclog our economy and keep it running smoothly. With our plumbers, we are responsible for paying the bill to enable them to do their job. The same is true for the officials; by paying our taxes, we essentially all pick up our share of the bill and expect them to do their share of the work. Without our capital, their positions would not exist; but this hardly means we have positioned ourselves as active parts of the recovery.

Investing to Make a Difference

To be an important cog in the recovery machine, we must put our money to work. Our money does not do any good stuffed in a mattress or buried underneath the deck. Private capital built this country and there are few economic problems that private capital cannot solve, if allocated effectively. During the Great Depression, a time when the economy constricted and the majority of construction projects were put on hold, the entire construction of the Empire State Building was completed. Thanks to funding from its principle backer, an automobile tycoon aiming to one-up a major competitor, the Empire State Building was constructed with staggering momentum. During the Depression, building materials were cheaper and workers were eager to earn a wage, much like today. The construction put people and money back to work in dire times; not to mention the mystique the building has given our country for nearly eight decades.

A project as grand as the Empire State Building might only come around once a century, but that does not rule out the need for quality projects in our own communities. When private capital teams with quality-managed projects, the outcomes can be extraordinary. But, you need both. Whereas quality projects cannot get off the ground without capital, poorly-managed projects get ran back into the ground even with all the capital in the world.

This recession has torn through our communities and left a stockpile of quality real-estate projects to collect dust. Without proper funding, the projects remain undeveloped, unproductive and severely underemployed. Placing our private capital into quality projects will bolster the number of available jobs in our communities and get people behind a meaningful cause. There are loads of individuals that could be taking charge and becoming part of this recovery. We will show great resilience when we, on our own, come out of this strong, super-charged and feeling part of something.

We have to put the days of excuses behind us. We should be searching for any project that someone says “can’t be done” and aim to defy. When the newspapers have stopped reporting stories that highlight economic blemishes, our unemployment numbers are approaching all-time lows and our government takes a permanent vacation from bailouts; we will only vaguely remember our current doubts. We will, however, remember the period of time when we all did our part to restore communities. We will remember the turning point when we took action to pull ourselves from the painful times and regained our spot as part of the equation.

Tags: bail-out, Bernanke, Billion, Business, Credit, deficit, do-it-yourself, economy, Finance, Geithner, media, obama, Paulson, Real estate, Retirement, Standing In The Rain, Stimulus, Thomas J. Powell, Trillion

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Reasonable Regulation: That’s Allstate’s Stand

            Many companies involved in financial services cower when an official of any stature mentions the threat of national regulation, but Allstate has decided to embrace it. Since late April, Allstate has been pushing an advertising campaign that is rooted in support for creating a national regulation agency for all players in the financial industry, including insurance companies. Each ad in the four-part series, which runs in major magazines such as The Atlantic, touts the common theme of calling on “Congress to act boldly and quickly in drafting strong, comprehensive and clear federal regulation.”[1]

             Under the current system, insurance companies are regulated on a state-by-state basis, something that Allstate CEO Tom Wilson thinks needs be changed. In a national press release, Wilson argued:

 The American consumer is burdened with a patchwork of insurance regulatory systems that are cumbersome and ineffective in managing risks in an era of rapid change and innovation. American families need better protection from systemic risks and access to products and services that will help better manage their financial futures.[2]

            Allstate’s push for a national regulation system is bold. The campaign appears to be having an impact as the Obama administration has started tackling a number of vital decisions that could ultimately lead to national regulation for all financial services. President Obama himself may not have been directly affected by Allstate’s campaign, but according to PRnewswire.com at least one Congressperson has received more than $20,000 in campaign contributions from Allstate over the past four years. Clearly Allstate has identified the potential benefits that would come bundled with national regulation.

            One group that stands to be trapped and bound by the regulatory net of a national system is the stock brokers on Wall Street. The Obama administration has proposed a plan that would hold brokers to the stricter fiduciary standards of registered investment advisors. Under this plan, brokers would be required by law to act in their clients’ best interests, not their own. Also, with each piece of investment advice, brokers would be obligated to disclose what they stand to gain personally. A plan to implement a complete regulation overhaul is sure to be cumbersome and will take time to be implemented effectively. The Obama administration would be wise to have patience with this reform and comb through all of the complexities before attempting to have anything signed into law.

 At the end of the day, the federal regulatory overhaul will aim to force those in the financial system to be more transparent, something the Allstate campaign clearly addresses: “Only when there is transparency around valuing the risk in the financial system—including the role of insurance to help mitigate that risk—will we regain confidence in the economy.”[3]           

To view all of the Allstate advertisements in their entirety, visit allstate.com/fedreg.

Commercial Real Estate’s Role in the Next Bailout

            Banks have had little to celebrate over the past 20 plus months. Still dizzy from the debacle caused by residential real estate, banks nationwide fear the devastation that could soon be unleashed by the rising number of foreclosures in commercial real estate.

            The banks which provided the money to build endless numbers of commercial buildings originally did so because they, like so many others, believed occupancy and rent rates would always consistently rise. But, many owners of commercial buildings are now fueling another wave of foreclosures because they are not able to generate enough cash from tenants to cover their principal and interest payments. Because the loans have also been bundled and sold on Wall Street as commercial-backed mortgage securities (CMBS), the foreclosed buildings spark a ripple effect. Anticipating the severe consequences this could have on our economy, the Federal Reserve is struggling to contain the situation and prevent the need for a second wave of bank bailouts.

            According to Deutsche Bank, about $153 billion in loans that make up CMBS will come due by the end of 2012. The vast majority of these will not be eligible for refinancing through their lenders because the values of the properties have dropped so dramatically.[4] The losses will potentially cripple not only the owners of the commercial properties, but also anyone holding CMBS. Furthermore, because CMBS typically help drive pension and hedge funds, the pain will be widely spread.

            The only positive side of this mess will be the number of affordable investment opportunities for those looking to get into commercial real estate. Commercial real estate does perform in the long haul. But, because of the onslaught of new commercial buildings that sprouted in recent years, we are now experiencing an uncomfortable rebalancing of the industry. Loans that were made on loose credit and then bundled by Wall Street into dicey investment vehicles are all being exposed. However, the underlying properties are not rotten; they still make for sound investments.

            Like the residential market, the commercial real-estate industry was saturated with quick deals that turned sour because they were not thought through. Now, because the consequences stretched so far, the commercial real-estate industry has to be turned upside down and untangled. Although the untangling process will be turbulent, it will also be exposing an array of investment possibilities. Commercial real estate provides the venues for consumer spending. As the economy slowly recovers, so too will the demand for prime commercial real estate—something that will be readily available and reasonably priced in the immediate future.  

Keep Health Care in Our “Best Interest”

            I have been reluctant to bring the argument of national health-care reform to the Powell Perspective because it does not necessarily pertain to real estate, finance or investing. But, national health-care reform has the potential to have drastic impact on our economy, and for this reason I believe it deserves attention here.

            I have been convinced to raise this issue after overhearing a 20-something at the gas pump discuss the issue with someone of similar age. “Man, the whole thing is no big deal, I mean how often do we really go to the doctor anyway?” he said. As I drove off, I realized that the young man, healthy and probably feeling somewhat resilient, was simply not interested in the topic. He wanted to be able to disregard the topic so he could have more attention to focus on the issues that had a more immediate impact on him.

            This week will bring an important turn in the debate over national health-care reform. The Obama administration has committed itself to rethinking the plan before the President is scheduled to address Congress on September 9^th. President Obama is now going to be leading the arguments that he has been able to mostly sidestep thus far. What has me concerned is that the administration will recognize what I did while pumping my gas: The youth do not care. If the Obama administration addresses this and rebrands the issue to somehow get the youth behind it, then the approval rating for health-care reform could skyrocket. The same demographic that helped the President win the office, could now help direct a national issue that they may not be truly interested in for another 20 years. On the other hand, maybe it is time to address the demographic who will still be paying for this change long after we are gone. After all, the people that currently have a vested interest are at a standstill after becoming equally heated on both sides of the issue.

            Since its appearance in the Obama administration’s limelight, health-care reform has done nothing but become more complex. The plan is unclear. No one knows what it will look like, we only know what the media reports: We’re currently 37^th in the world in health-care quality. Death panels will dictate how long we live. The President will personally pull the plug on our grandma. If there are details to this administration’s plan, then they have all been shadowed by heated talk show hosts’ attempts to get the public screaming about something no one knows about.

            On September 9^th President Obama is going to be forced to add some structure to his administration’s plan. Thus far, no one has been able to dissect and discredit the plan because it has only taken shape through various town hall meetings and informal gatherings. In his first address to Congress since February, President Obama will be talking exclusively about health care. This national issue is going to take rigid leadership from the President. If he wants to make any progress he is going to have to involve the nation by getting the young to care and the old to stop shouting at one another and listen.

Tags: 60-40 split, advertising, advertising campaign, Allstate, alternative asset class, alternative investments, bailout, Bank, Basis Points, benefits, Bernanke, Billion, bold, business week, Cash For Clunkers Part One: Good For Business?, cmbs, commercial real estate, commerical backed mortgage securities, Compounding Interest, confidence, Congress, contrarian investing, Credit, deutche bank, due diligence, economics, economy, ELP Capital, fiduciary, Finance, financial, Financial Future, Financial services, forbes, Geithner, harvard business review, Harvard Real Estate, health care reform, health-care, Hedge against inflation, Inflation, Investing, investment advice, market fluctuation, Money, Money Market, national regulation, newsweek, obama administration, Paulson, Piggy Bank, President Barack Obama, principal and interest payments, private investing, Putting cash to work, Putting Money to Work, Real estate, real estate asset class, real estate assets, real estate trends, Resources, Retirement, risk analysis, Ronald Reagan, Rule of 72, scared, Short Sales, Smart Money, Standing In The Rain, stock and bond split, tangible assets, The Atlantic magazine, The Powell Perspective, Thomas J. Powell, thomas powell, tom powell, Tom Wilson, traditional investment, transparency, Trillion, Trust, Trust But Verify, volatility, Wall Street, Wall Street Journal

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Stats Won’t Save Us

Every day, and every minute somewhere on the Web, another statistic that hints at an economic recovery is reported, copied, translated, manipulated and reevaluated. It seems for every positive up tick in economic numbers, there is also a negative. We have been experiencing shaky times for the past 20 months. Every sector is not going to at once join together on an all-knowing graph somewhere and move together as one gradually-rising black arrow.

Stats are meant to give us market indication. “Experts” on the economy make sense of the stats by attaching other positive attributes to them without any solid proof. In social psychology, it is similar to how the halo effect works: If I see Bob Somebody helping an old lady cross a busy intersection, then I automatically believe Bob to be a good person; without having any solid proof. Helping the elderly in dangerous situations is good, I saw Bob do that, so Bob must be good. Similarly, the media tells us recessions are scary and bad, positive things do not happen in recessions; therefore a positive up tick in one sector must mean we are out of the bad recession and into the good recovery. Experts link good news with other good news without any solid proof.

Earlier this month, Newsweek ran a cover that pictured a big red balloon which read “The Recession is Over!” The cover and its related story caused a small uproar that resulted in criticism from President Obama. Although the cover story was meant primarily to sell magazines, the author did make a solid point: “… when economists proclaim a recession over, they’re celebrating a technicality: they mean economic output has stopped contracting.”[1] When the economy stops contracting, it does not simultaneously return to the rising rates we experienced in the years prior to this recession.

The reporting of numbers, percentages, graphs and ratios should only be taken for face value. We use them as indicators, as ways to gauge where we are and the possibilities of where we could be heading. Be aware that we are approaching a period that is sure to be overflowing with economists eager to be the first to accurately predict the recovery by accident. Statistics will punctuate every news story you ingest. A small increase over a quarter is no reason to speculate and sink loads of savings into any financial market. The recovery will come. As we work towards it, I encourage you to stick with the basics. Own stocks that make sense. Consider incorporating alternative investments such as real estate into your portfolio not only because of their soundness, but also because they work as a wonderful hedge against inflation. Pay off debt. Adapt to the times. And, most importantly, focus on those things in your life that you care about the most.

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Cash for Clunkers Part II: Dealers Have Clunkers, No Cash

            In last week’s first Cash for Clunkers installment, Cash for Clunkers Part I: Good for Businesses?, I discussed the potential threat the program poses for small businesses. This week I am presenting Part II.

            Auto dealers across the country have been accepting qualified jalopies from consumers in exchange for up to $4,500 off of a new ride. Under the guidelines of the program, the federal government promised to repay auto dealers if they submitted the appropriate rebate forms. This week, the Department of Transportation (DOT) reported that 411,624 rebates have been submitted, totaling over $1.7 billion—more than half of the $3 billion that the government dedicated to the program.[1] Then yesterday U.S. Transportation Secretary Ray LaHood announced the program would be shut down Monday August 24^th because the $3 billion had dried up.

            The concern underlying the delayed payments is two-fold. For one, this is another commitment the government volunteered American tax dollars to without being adequately prepared to efficiently follow through. With every new government-sponsored program, we are losing loads of money to inefficiency. The second concern is that dealers typically purchase new cars from the manufacturers through finance programs. Often times, such financed deals cannot be paid off if the dealers are waiting on money from the government. Therefore, the dealers continue to pay substantial interest charges, which cut their profits on the vehicle sales. Interest fees could be difficult for many dealerships to swallow during what has so far been a dismal year for the auto industry.

            According to the National Highway Traffic Safety Administration (NHTSA), the federal agency in charge of overseeing Cash for Clunkers, it is racing to dedicate more staff to deal with the current massive backlog of rebate applications. The DOT reported that the NHTSA Cash for Clunkers staff “will hit 1,100 by the end of this week.”[2] In order to reach this high number of staff members, Citigroup and federal employees are being taken away from their current duties to help clean up the program.

            The ideas behind recent government-sponsored programs are rushed through Washington only to reach the general public with great inefficiencies. It is true, as Warren Buffet recently wrote in a New York Times opinion article, that “Our immediate problem is to get our country back on its feet and flourishing – ‘whatever it takes’ still makes sense.”[3] However, “whatever it takes” does not always need to translate into sacrificing preparation for the sake of immediate action. The amount of money the government wastes trying to clean up these programs after they are implemented could be dramatically slashed if officials took more time to think them through.

Short-Term Investments Clash with Long-Term Goals

            While investors who armed their portfolios for the long-term still experienced massive losses, they are better suited to ride out the turbulence than those who speculated for the short term. Stocks prices have jumped 40 percent higher than recession lows back in March, but investors should still be prepared for market pullback, which appears to be inevitable. With many experts predicting a bumpy recovery, long-term investments are getting more and more attention.

            Hoards of investors panicked and pulled their long-term capital from equities as the stock market deteriorated. Now, many of them are attempting to patch up their battered portfolios with stable, productive long-term investments. As investors’ emotions are calming and they are again taking action with their life goals in mind, the hunt for smart investments with long-term perspective is becoming more appealing. The media reports daily that we are amidst a buyers’ market, but the majority of the opportunities are suited for short-term investors looking to reclaim their loses overnight. After experiencing record losses, individuals are less cautious of risk. They are more willing to take on greater risk if it comes with the slight chance that they can quickly heal their deep financial wounds. However, wise investors are curbing the need to speculate in the short term and are once again assessing their long-term goals in order to help them guide their financial decisions.

            If your overall goal is to have the money you have earned make you enough money to live on after you retire, then you need to be looking beyond the stock market. A balanced portfolio with a dose of long-term investments, such as owning real estate, hedge funds, venture capital-related projects and REITs, is much more likely to help you achieve your life goals. Plus, short-term investments tend to carry headaches and heavy price tags, while longer-term investments tend to ride out turbulent markets and be priced more appropriately. Whatever the amount of financial losses you have recently experienced, remember to let your life goals play a part in your investment decisions.

Gradual Recovery, Not a Quickbound

            Many economists who hypothesized a steep, booming recovery have now changed their predictions. Historically, dramatic plummets have frequently resulted in steep recoveries. However, the current recession has the characteristics that are likely to breed either a slow, gradual rebound or a slight rebound followed by a new slump.

            The numbers for key indicators of economic growth this summer have been, at best, mixed. On the bright side, stock prices have climbed more than they have fallen, our gross domestic product is declining at a duller rate and job losses have slowed slightly. But, our unemployment rate still teeters around the highest levels reported since the early 1980s, consumer confidence fell in June and July, and homeowner vacancy remains well above the long-term average.

            Statistics aside, what we are likely to see is the emergence of a slight rebound, being fueled partially by consumer spending that cannot be sustained. Customers have been momentarily lured to the big-ticket-item marketplace because of juicy incentives such as the $4,500 Cash for Clunkers rebate and the $8,000 federal tax credit for first-time home buyers. Federal stimulus money will continue to help rejuvenate the economy for the remainder of the year, and likely on into 2010. But, when the money tanks get low, the recovery is going to once again become reliant on natural factors, such as consumer spending and successful businesses.  

            Consumers are likely to make large purchases less frequently because of new tendencies to save instead of charge. Households are saving much more than they have at any other point this decade. This is putting a muzzle on consumer spending, which accounts for around 70 percent of our GDP. Frugal customers are forcing businesses to reevaluate their business strategies. Furthermore, businesses are being required to implement money-producing techniques not reliant on excessive borrowing, which is and will continue to be rare. If consumers and businesses cannot sustain the momentum achieved by the stimulus money, then another slump will inevitably develop.

            The main initiative for the stimulus money is to breathe life back into significant economic driving forces like consumer spending or business investing. Currently, our major driving force, which is just barely keeping the economy idling, is the federal stimulus money. Throughout the end of 2009 and into 2010, we are all going to be responsible for building solid, long-term strategies that will be stable long after the federal stimulus tanks run dry. The government’s spending programs may have helped us avoid a financial apocalypse. But, without taking on the responsibility to continue moving our economy in a positive direction when the funds run out, we will soon find ourselves in another dire slump.

Tags: Add new tag, Bank, Bernanke, Billion, Credit, due diligence, economy, Finance, Geithner, Harvard Real Estate, Money, Paulson, President Barack Obama, Putting Money to Work, Retirement, Short Sales, Standing In The Rain, Stimulus, The Powell Perspective, Thomas J. Powell, Trillion

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