David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).
~~~
A Lynch Mob!
March 21, 2009
“Let’s go hang ‘em.”
American history is replete with examples of lynch mobs taking control of a situation and inflicting injustice. In the end most lynch mobs have dealt harmful blows to society. Congressional action to punish AIG employees over the bonus issue is already seeding that outcome.
Members of the US House of Representatives who voted for this bill said they were reacting to the anger of their constituents. In failing to show leadership they have just undermined the entire structure designed to repair the financial system.
Specifically the House did the following:
1. They licensed the abrogation of contracts. Their message is simply that it makes no difference what rules we put into effect now; we can and will change them so you cannot depend on them. Global businesses take heed: Your previous judgment about the sanctity of US law has been rendered faulty by our political leadership.
2. They passed retroactive taxation. Their message is that, whatever you plan with regard to the federal tax code, do not assume consistency and do not build any reliability about your government into your decision making. We, in Congress, can reverse our laws and confiscate your results.
3. They made the tax punitive. A 90% tax on something is like taking all of it. The chairman (Rangel) of the House taxation committee actually admitted that by taxing the 90% he was leaving the remainder for the states. In other words, states are now encouraged to engage in the same form of behavior.
Sure citizens are outraged over the $165 million in bonus payments to AIG staff. But they should direct their outrage at the Congress and not threaten the employees or their families with personal injury. The Congress authorized these payments; Dodd, Geithner, and Obama Administration personnel admitted that. Remember, the law passed without giving anyone the chance to testify in public hearings and without allowing comment on the draft legislation. When the law originally went through the Congress, the House leadership suppressed amendments. This Barney Frank and Nancy Pelosi-led House is especially guilty of ignoring the rule of law. They are now guilty of encouraging the rule of lynch mob.
The result of this House action is already damaging. The federal regulator of Fannie Mae and Freddie Mac has shown the courage to ask that this law not be advanced in the Senate. We expect to hear more from those federal personalities who have the strength to speak up and oppose this House-approved proposal.
But depending on the Senate to soften the law or depending on the US Supreme Court to overturn it is a dangerous strategy. Some Congressmen admitted privately that they voted in favor because of constituent pressure, even though they were really opposed to the concept. They voted “yes” because they were relying on the Senate or the courts to say “no.”
Some damage is already done. Firms that were gearing up to participate in the federal program to be announced this coming week are considering withdrawal. They fear that any action which puts them into the federal assistance plan will subject them to the chance of retroactive punishment and taxation. The House has undermined the so-called public-private partnership designed to help restore financing of consumer items like automobiles and credit cards. We expect that the participation in the program to be announced this coming week will be tepid at best.
At Cumberland, we are advising institutional clients to take great care when engaging in any form of activity with the federal government. Simply put: a lynch mob can turn on you in a second and cannot be trusted. The risk is now very high.
Other firms that are already acting with TARP monies, or other federal monies for that matter, are seeking ways to deleverage and exit. In the entrepreneurial and risk-taking business and financial community the universal response to this act by Congress is outrage and distrust and disgust.
So far President Obama is silent on this lynch-mob approach. He has yet to declare himself against it.
Obama needs to be reminded of a parallel in history. A century ago a man named Leo Frank was lynched in Georgia for a murder he did not commit. Local politicians supported the lynch mob; those courageous politicians that opposed it were voted down. Frank was an innocent victim. His subsequent posthumous pardon did not undo the harm.
A century later a man named Barney Frank brags about the earmarks he obtained for his Congressional district (see his website). This modern Frank foments the modern-day version of a lynch mob. The House of Representatives and the Financial Services Committee under the leadership of Barney Frank have made the first day of spring, 2009 a sad day for America. They suppressed the rule of law; they chose the rule of the lynch mob; they are now going to have to live with that result.
When the citizens of America realize what the House has done, they may redirect the lynch mob against the Congress. That is coming next. As Yogi Berra said: “This ain’t over till it’s over.”
~~~
We fly to Europe in a few hours and will chair the Global Interdependence Center delegation at the Paris conference next week (see www.interdependence.org ). Meetings will include central bankers, global investors, and businessmen. Our private roundtable will now also address this House action and what it means for US policy and American markets. Current scheduling from Paris includes CNBC on Monday at 10 AM New York time and again on CNBC on Tuesday morning at 5 AM New York time.
David R. Kotok, Chairman and Chief Investment Officer, email: david.kotok@cumber.com
Investigating AIG
Everyone seems to be all abuzz about the Mike Taibbi takedown of AIG in Rolling Stone. Its a fun read — as is any piece that begins “we’re officially, royally fucked” — but there are a few other columns that do an excellent job contextualizing 1) How AIG got so heavily involved in CDOs and CDSs, and 2) What its going to take to clean up the ginormous mess they made.
If you are interested in learning the nitty gritty details about how AIG’s Financial Product division (AIGFP as it came to be known), then the place to start reading is the 3 part series WaPo did in the fall: Investigating AIG (full linkage below).
The clean up half of the story is best described by Carol Loomis in this month’s Fortune. (She makes it pretty clear that Liddy is not the bad guy).
Get crackin’ . . .
Investigating AIG: The Washington Post
Part I: The Beautiful Machine
Part 2: A Crack in the System
Part 3: Downgrades and DownfallsAIG’s rescue has a long way to go
Carol J. Loomis
Fortune DECEMBER 29, 2008: 10:46 AM ET
http://money.cnn.com/2008/12/23/news/companies/AIG_150bailout_Loomis.fortune/index.htmBehind Insurer’s Crisis, Blind Eye to a Web of Risk
GRETCHEN MORGENSON
The New York Times, September 27, 2008
http://www.nytimes.com/2008/09/28/business/28melt.html
The Big Takeover
MATT TAIBBI
Rolling Stone Mar 19, 2009 12:49 PM
http://www.rollingstone.com/politics/story/26793903/the_big_takeover
Nouriel Roubini: The 2009 TIME 100 Finalists
AGE: 49 OCCUPATION: Economics professor PREVIOUS APPEARANCES ON THE TIME 100: 0 PRO: He warned of a subprime meltdown as early as 2006, and the thoroughly spot-on, reliably depressing predictions that followed have made him one of the most sought-after prognosticators in the country. CON: Presumably not much fun at parties.
Late Night Music: "Hey Paul Krugman"
"And for those of you wondering about yours truly — I’m temperamentally unsuited, have never had any desire for the job, and probably have more influence as an outside gadfly than I ever could in DC."
Paul Krugman on the possibility of being appointed Treasury Secretary, Nov 26, 2008
Credit Unions, Bank Failures, and More
Regulators swoop and seize,
None "too big to fail".
by Soylent Green Is People
A couple of key points: these "corporate credit unions" don't serve the general public, and all "natural person" credit union money held at these corporate credit unions was guaranteed earlier this year.
From the WSJ: U.S. Seizes Key Cogs for Credit Unions
The affected institutions don't serve the general public. They provide critical financing, check clearing and other tasks for the retail institutions. These wholesale credit unions, known in industry parlance as corporate credit unions, are owned by their retail credit-union members.And from the NCUA January letter to Credit Unions:
Offering a temporary National Credit Union Share Insurance Fund (NCUSIF) guarantee of member shares in corporate credit unions. The guarantee will cover all shares, but does not include paid-in-capital and membership capital accounts, through December 31, 2010. This guarantee is the equivalent of full share insurance on member shares and will be extended beyond that date by the NCUA Board if necessary.So the natural person credit unions (the ones that serve the public) have had their money guaranteed.
Still the losses will be huge:
[Michael E. Fryzel, chairman of the National Credit Union Administration, the industry's federal regulator] said NCUA's latest estimate is that wholesale credit unions will eventually have to realize between $10 billion and $16 billion in losses on their holdings. The agency on Friday also raised its estimate for what these losses will cost its insurance fund, to $5.9 billion from the prior $4.7 billion estimate.
The federal government will announce as soon as Monday a three-pronged plan to rid the financial system of toxic assets, betting that investors will be attracted to the combination of discount prices and government assistance.
Banks Leaving Money on the Table "All Day Long"
If you missed this, Zach Fox at the North County Times had an incredible story: HOUSING: Banks selling properties in bulk for cheap
For example, a unit of Citigroup, the troubled financial giant, sold a foreclosure in Temecula to an Arizona investment firm for $139,000 when comparable homes in the area were selling for $240,000 to $260,000.Citi just left $100,000 on the table.
The firm listed the home for $249,000, received multiple offers and the property has entered escrow, said Amber Schlieder, the real estate agent who handled the listing.
I hear stories like this all the time.
Here is a short video from KCET with a couple more examples (these are short sales):
Clearly the banks are overwhelmed and the process is broken. Maybe there is an opportunity here for added transparency ...
Solving the Housing Crisis
This last Tuesday the Wall Street Journal published an op-ed by my friend Gary Shilling and Richard LeFrak. They offer a simple solution for the housing crisis: give foreigners who will come to the US and buy a home resident status (green cards). This is a very important proposal and one that deserves national attention and action. Gary was kind enough to send me two lengthier white papers offering more facts. In this week’s letter we are going to look at this proposal in more detail than the small space that an op-ed can offer. And while this letter will be somewhat controversial in some circles, I ask that you read it through, giving me the time to make the case. I will also add a few thoughts as to why this could not only help solve the housing crisis, but help put the nation back into growth mode.
Long-time readers know that I have been growing more and more bearish of late. I have been writing for a long time that we are in for a long period of slow Muddle Through growth as the twin crises of the
housing bubble and credit bubbles require time to heal. Today we look at a serious proposal for cutting the time to healing for at least one of those bubbles (housing), and at least keep the other (credit) from getting worse. This is the most serious idea I have seen that could actually make a realpositive contribution to the economy and help put us back on a growth path.
I will post Gary’s papers and a link to the actual op-ed piece for those who want to do further research, but let me make one point at the beginning that he did not emphasize: the US is already allowing roughly 1 million immigrants a year into the country (which for a variety of reasons I and most serious economists of all stripes believe is a very good thing). We are suggesting that we simply change the nature of what constitutes the conditions for acceptance, so as to jump start the housing industry and the economy. We are not suggesting additional immigrants, although nothing would be wrong with that. I will also post a link for you to send this e-letter to your congressmen and senators.
Let me put up front a few benefits of a program that would allow legal status to immigrants buying a home. Housing values would stabilize and in many cases rise. The massive losses because of bad loans that are being subsidized by US taxpayers would be stemmed, saving many hundreds of billions, if not a trillion or more dollars. The excess inventory of homes would quickly disappear and the millions of jobs that were lost as home construction fell into a deep depression would come back. If housing values rise, many families would be able to refinance their homes at lower rates and have more income left over after paying their mortgages. $12 billion in commissions would end up in real estate agents’ pockets, helping a very battered and bruised group. Hundreds of billions will flow into local businesses, as these new immigrants will need to furnish their homes. This could mean as much as a half trillion dollars in sorely needed stimulus in the next few years, without one penny of taxpayer money and actually adding taxes back to governments from local to national. And we are not bringing in 1 million foreigners, we are attracting 1 million mostly middle-class new Americans, which, if we are smart in how we do this, will result in more jobs for all Americans. So let’s jump right in and look at the details.
Housing Could Drop Another 20% in Pricing
Let’s review the situation as it will be if we do nothing. Shilling shows that we built 6.7 million more homes in this country between 1996-2005 than the normal trend would have projected, partially because we underbuilt the decade before that. New housing starts average about 1.5 million in normal times but have
fallen to 500,000 recently, and could fall further as unemployment rises and demand declines. Even so, Shilling estimates that we still have about 2.4 million excess homes.
This compares rather well with estimates by independent analyst John Burns, which I cited in the e-letter early last year. What they both agree on is that it will take at least until 2012 to work through this excess inventory, and that assumes that foreclosures do not increase as housing prices drop.
Excess supply of anything means lower and continuously falling prices, and that has certainly been the case in housing. Here is what Shilling writes:
“We believe that if nothing is done to eliminate surplus housing, prices will fall another 20% between now and the end of 2010 for a total peak-to-trough decline of 37% (Chart 1 below). The resulting further negative effects on the economy will be devastating. At that point, almost 25 million homeowners, or almost half the 51 million total with mortgages, will be underwater… That’s also a third of the 75 million total
homeowners, with the remaining 24 million owning their houses free and clear. It would take a little over $1 trillion to reduce their mortgages to the value of their houses, compared to $449 billion for the almost 14 million currently underwater.”
This is not inconsistent with similar projections by other acknowledged experts and independent analysts like John Burns and Professor Robert Shiller of Yale. If nothing happens to stimulate buying, there is a great deal more pain ahead for American homeowners.
For the great majority of Americans, their homes represent the largest portion of their assets. This is particularly true of Americans of more modest means, who have been hit the hardest. Watching their single biggest assert drop another 20% will be devastating and for many will mean they will not be able to retire
as they had planned. More Americans own homes (68%) than own stocks (50%). This helps explain a recent poll which shows more Americans are worried about house prices than about the decline in stock prices.
Falling home prices means that consumers have to save more for retirement, which results in lower consumer spending, which translates into lost jobs and more homeowners coming under stress — a vicious spiral that is increasing unemployment. Realistic estimates of unemployment rising to over 10% within the year abound.
Two years ago I and a few others foresaw the current housing crisis (and an accompanying credit crisis), predicting a protracted recession and a slow, multi-year Muddle Through recovery. Sadly, I was right about the housing crisis. Without some intervention, there is little to suggest that the prediction of a long, protracted recovery will not come true.
Lowering rates, as is being discussed in various circles, will help homeowners who can make their payments, but it does nothing to really bite into excessive inventory. Until we reduce the inventory, housing prices in many neighborhoods all across America are going to continue to come under pressure. And as Barry
Habib points out, while the Fed may be lowering rates for securitized packages of loans, those low rates are not available to the average home buyer. The cost of packaging and securitization adds considerable cost.
Shilling discusses the “traditional” options for reducing home inventories, but in the end there is no real solution other than time, or massive amounts (read trillions) in taxpayer money being given to homeowners, which will be very unpopular, as homeowners who were responsible and are paying their mortgages would get no benefits. Waiting another two and a half years for the excessive inventory to sell will keep this country in a very slow or no-growth economy, and devastate the wealth of millions of homeowners.
But there is a solution. There are millions of foreigners throughout the world who would like to come to live in the US. In 2006, there were 1.1 million immigrants allowed into the US, some 63% of whom were allowed in simply because they already had relatives here. Only 13% of visas were granted to people because of their skills. While allowing relatives of current residents to come to the US may be a humane and reasonable policy, it does nothing to assure they bring more than that relationship to help them make their way in the US.
Buy A Home, Get a Green Card
What if we changed the rules for a few years? Starting as soon as possible, we should allow anyone to come into the country who would buy a home. They would be given a temporary visa which would become permanent if they had no problems after, say, five years. While Gary proposes that they be allowed to borrow against the value of their homes, I lean toward suggesting that initially we take those who buy their homes outright (with a few exceptions). That means they have enough capital to purchase a home to begin with, which probably means they are educated and have skills. In fact, if they have enough cash to buy a home, that means they would have more actual savings than most US citizens. We would be attracting future citizens with the capital to invest in job-creating businesses and/or who have useful skills to assist in
the recovery of the US economy.
Of course, there should be some rules that go along with this proposal. Background checks and references should be required. The home could not be rented for a period of time (at least two years), to help reduce the supply of available housing, and could not be resold for at least two years unless another home was purchased. There should be a minimal price, which could be somewhat different for various regions, but
$100,000 would seem to be a good minimum for most areas, with higher minimums in certain areas.
The immigrant should demonstrate the ability to support himself and his family for a period of time (at least one year, preferably two), including the purchase of health insurance. Cash or letters of credit or other guaranteed commitments would be required. Only immediate family members (spouse and children) would be allowed to come with the immigrant. Cousins and siblings must buy their own homes. The permanent
visa should be contingent on not having gone on welfare or public assistance at any time in the past five years. We are trying to solve a housing problem, not looking to create others. I would make an exception in having 100% financing for immigrants with advanced degrees or special skills, especially those who did their schooling in the United States. If the US is to remain competitive in an increasingly technological world, we need more scientists and engineers. But getting permission to stay is becoming increasingly difficult. We are seeing a brain drain of those who would like to stay and create new jobs and technologies (and buy houses) here in the US.
Shilling and Le Frak write:
“The authors of this report believe
that a number of people have given up waiting for those visas or don’t want to
put up with the hassle and are leaving the country. This “brain drain” is
unfortunate since many of these foreigners are highly productive. In 2006,
foreign nationals residing in the U.S. were named as inventors or co-inventors
on 25.6% of the 42,019 international patent applications filed from this
country, up from 7.6% in 1998. Studies of the authorship of academic papers
show the same trend.
“U.S. educational institutions are
considered the best in the world by many and are magnets for foreign students,
especially at the graduate level. Many of them are inclined to settle and work
in this country after completing their studies, if they can obtain permanent
resident status.
“The Council of Graduate Schools
survey revealed that in the fall of 2007, 241,095 non-U.S. citizens were
enrolled in graduate programs. Technological progress and the productivity it
generates depends on people educated in biological sciences, engineering and
physical sciences, but only 16% of U.S. citizen graduate enrollment was in
these three disciplines. In contrast, 55% of total non-U.S. citizen enrollment
was in those fields. Conversely, 53% of graduate enrollment by Americans was in
education, business and health sciences while those three fields accounted for
only 24% of foreign graduate students.”
(There is a great deal more background
detail in the second white paper. See link below.)
Much can be
learned from similar programs already in place in immigrant-hungry countries
such as Canada, Australia, and New Zealand. The United Kingdom has recently
added new programs. Many countries realize that in the coming years there is
going to be increasing competition for the best and brightest of the world.
Again, there are more details in the white papers, but let’s turn to the
effects that would result from such a program.
A Real
Stimulus Package
First, upon Congressional
approval, it would almost immediately stop the seemingly inexorable slide in
house prices, as initial demand would be significant. Let’s assume one million
new immigrants would buy homes. At an average price of almost $200,000, that
would be $200 billion injected into the economy. And each of those homes has to
be furnished, food has to be bought, clothing will be needed, local taxes will be
paid. Airplane tickets to research potential areas, hotels needed during the
interim period, and other related expenditures would add up. Over two years,
this could easily be another $100 billion.
Couple 1
million new buyers with current US demand, and the excess inventory would be
worked through within a year, and possibly faster. This puts a floor under the
housing market, and home values could once again to begin to rise in line with
a growing economy.
Such a program
would have a salutary effect on the value of the dollar, as not only the
initial purchases of homes and materials would need to be converted to dollars,
but it is likely that immigrants would bring even more capital into the
country.
By stemming the
fall of home values, it would decrease the likelihood of foreclosures and help
homeowners get refinancing at lower rates. Refinancing now is difficult because
most lenders want a substantial slice of equity to go along with any new
mortgage. If your home value has dropped 20% and is likely to fall another 20%,
it is hard to have enough equity to qualify for a new mortgage. Stopping the
fall in prices is critically important; and maybe if prices rise in some areas,
homeowners will be able to refinance at better rates, giving them more cash
each month to save or spend.
As I have
written in previous letters, the psyche of the American consumer is permanently
scarred. We are on our way back to a savings rates that will look more like
1987 than 2007, when it was almost zero. Just a few decades ago, we saved
7-10%. Consumer spending was only 64% of US GDP in 1987. It was 71% in 2007. It
is on its way back to that lower level.
Lower consumer
spending will be a drag on growth for years. But bringing in 1 million already
middle-class new immigrant families will help make up for a lot of that reduced
spending. If you can spend $200,000 on a home, you are likely skilled at
something and well-educated. You will find a job, or create one, as many
immigrants do, and then you will add to our total consumer spending.
If you are a
real estate agent, you should love this proposal, as it would result in an
additional $12 billion in commissions.
If you are a
home builder, what a great way to reduce inventory and get back to the
conditions where there is a demand for your product. This would help put back
to work those who have lost their jobs in the home construction collapse. Home
Depot and Lowe’s and local stores? It would help them to increase sales, which
leads to more jobs.
We are on the
cusp of the Baby Boomers beginning a huge wave of retirement, both in the US
and elsewhere in the developed world. There is going to be a need for skilled
workers to replace those Boomers, as well to provide services to the retirees.
Further, the promised Social Security and Medicare expenditures are going to
start increasing at a significant rate. We are going to need immigrants to help
pay for those benefits. Given the controversy over immigration, we will look
back with some irony in ten years when we find we are in a serious competition
with other nations to attract skilled immigrants. We should start now. I think
the concept is, let’s not waste a good crisis.
Let’s look at
some of the potential critics of this proposal. I was on Yahoo Tech Ticker yesterday talking about
this, and got a few irate emails and phone calls.
“Why,” I was
asked, “do I hate American workers? Isn’t there enough unemployment? Why do we
need more immigrants taking American jobs?” And there was considerable angst
about illegal immigrants.
First, I am
suggesting we transform the already existing legal immigrant flow, which is
going to happen anyway, into a form which helps us solve a major crisis. I am
not talking about adding another 1 million immigrants on top of the current
legal inflow. Just change the nature of that inflow until the excess housing
inventory is settled, and then we can go back to the current program, if that
is what is wanted (more on that below).
Second, I am
not suggesting we bring in or condone illegal immigrants. That is another issue
altogether, for another debate at another time.
If we do
nothing, unemployment is going to rise to at least 10%. That is certainly not
good for the American worker. Home values are going to continue to fall. That
is certainly not good for the American worker. The economy is likely to be
stagnant for an extended period of time, which means job growth in a Muddle
Through recovery will be slow and stagnant. That is not good for the American
worker.
Hundreds of
billions more of taxpayer dollars will have to go to banks to keep them solvent
as falling home prices and increasing unemployment increase foreclosures. That
is not good for the American worker and taxpayer.
And further, I
am not talking about bringing 1 million foreigners to this country. I am
talking about bringing 1 million future Americans, who want to work hard and
live the American dream.
Let me say a
few words to those who are opposed to immigration — and I have heard from
you. With few exceptions, US citizens reading this have an immigrant in their
genealogies. Some of mine go back to the 1600s. Some of mine were not exactly
considered welcome. “No Irish and Dogs allowed” read the signs. But immigrants
and their children have been the driver for growth in this country for
generations. It is hard-working immigrants who leave their homes for the dream
of being Americans that have been the backbone of the building of the nation –
the hewers and shapers, if you will.
It is precisely
that melting pot of human diversity that is the strength of the American idea.
Each new wave of immigrants has been viewed with trepidation or scorn, yet
within one generation they have become American. And in turn, their children’s
children forget that their forebears had to deal with discrimination.
America –
the US — is not so much a country as it is an idea, the idea that anyone,
regardless of race or religion or gender, can come here and with hard work and
determination make their own way. Some end up owning the local deli, and some
end up founding Google. Some 25% of Silicon Valley start-ups, I am told, are by
immigrants, creating jobs at the bleeding edge of technology. They see the US
as a land of opportunity. That is why so many want to come and that is why we
can attract a new generation of affluent, self-reliant immigrants who can help
us solve a problem that we created.
I
can see no downside to changing our immigration policy for a few years. We
solve the housing crisis, stabilize home values, brings hundreds of billions in
stimulus to the US, and with no taxpayer outlay. For a short time, we
substitute one class of immigrant for another, to solve a serious crisis. It is
not a matter of immigrants or no immigrants, just which immigrants
So
which do you want? 10% unemployment and a decade of lower home values and
increasing foreclosures, with a slow, Muddle Through, jobless recovery, or a
stable housing market and home construction back to trend?
If
you agree with me, I suggest you contact your Congressman. You can go to
http://www.visi.com/juan/congress/
(selected at random from many such sites) and type in your address and get the
name of your congressperson and senators. Just tell them you like this idea,
and cut and paste the link where you read this into the letter. And tell them
to get into gear! I would like to point out that this proposal is not Republican or Democrat, it is just common sense.
I hope we can get broad bipartisan support.
The link to the Wall Street Journal editorial is:
http://online.wsj.com/article/SB123725421857750565.html
The links to the white papers are:
http://www.frontlinethoughts.com/pdf/Housing_Whitepaper_1.pdf
http://www.frontlinethoughts.com/pdf/Housing_Whitepaper_2.pdf
Las Vegas, La Jolla and the OC
I
expect I will get a few new readers from this letter. Normally, at the end of
my regular weekly letter, I make a few personal comments. I write this free
weekly letter to my 1 million closest friends, and you can add yourself to the
list at
www.frontlinethoughts.com.
You can find out more about me at
www.johnmauldin.com.
Parts
of this letter have been written in New York and Dallas, and as I write this I
am on a flight to Las Vegas to speak at a conference on natural resources. I am
sure the recent Fed actions will be at the center of conversation. There is not
enough space now to comment on that; but I did do a few segments on Yahoo Tech Ticker (one of which evidently made
the Yahoo home page), which you can listen to at the following links.
Links to the Yahoo segments:
D.C. to America: You Can’t Handle the Truth
http://bit.ly/10rUiF
Plan to Solve Crisis: Let Immigrants Buy Houses
http://bit.ly/W0XLq
Fed Strategy: Spread Economic Pain Over Multiple Years
http://bit.ly/wgGjA
I will be in La Jolla for my annual
Strategic Investment Conference in two weeks, as well as hosting the Richard
Russell Tribute Dinner. The dinner is shaping up to be a big event, with hundreds
of attendees and many of the brightest lights in the investment writing world present
to honor Richard for 50 years of brilliant commentary.
I
really enjoyed my trip to NYC. I had a great steak dinner with Art Cashin,
everybody’s favorite commentator on CNBC. Breakfast with Tom Romero and then a
meeting with Jim Cramer, who I found to be very personable and genuinely
likeable. Meetings in the afternoon with business partner Steve Blumenthal,
then breakfast the next day with Barry Ritholtz, Yahoo at the NASDAQ, and then
a speech at noon, back on the last flight and up writing — and then this
plane, which I hope ends up in Las Vegas.
In addition to being with old
friends Doug Casey and David Galland (and their posse), I intend to see the
inside of the gym and spa. I need it. Tiffani has been gone for two weeks,
working on our book, and will get back on Monday; and the new chapter I was
supposed to have for her has disappeared in a reboot from this laptop. I am
quite distressed, but evidently the book gods decided it needed a major rewrite.
Have a great week, and find a few
friends and share some laughs and your adult beverage of choice.
Ok, the computer crashed again, and
this letter is going out on Saturday rather Friday night. But I did get to see the
Jersey Boys (The Story and Music of Frankie Valli and The Four Seasons) here in Vegas last night. One of the best shows I have seen in
years. See it when it comes near you.
And if you are in Las Vegas, eat at
Wolfgang Puck’s new place, called Cut. One of the best pieces of steak I have inhaled
in years. And now it really is time to hit the send button and go attend the
conference.
Your wondering if we can actually get some action analyst,
John Mauldin
Copyright 2009 John Mauldin. All Rights Reserved
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John Mauldin is the President of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS) an NASD registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.
Stress Test, Quarterly Forecasts for Unemployment and GDP
Earlier I posted the publicly released economic scenarios from the Supervisory Capital Assessment Program (bank stress tests).
The following graphs shows the stress test economic scenarios on a quarterly basis as provided by the regulators to the banks as part of the FAQs (no link). I've also added the most recent forecasts from Paul Kasriel at Northern Trust, and from Goldman Sachs (no link) for comparison.
The first graph is for the unemployment rate through 2010. This is a quarterly forecast - the January unemployment rate was 7.6% and February 8.1%.
Click on graph for larger image in new window.Although the two private forecasts don't include all of 2010, it appears that both the Kasriel and Goldman forecasts are near the "more adverse" scenario for 2009.
The second graph makes the same comparison for changes in real GDP.
An interesting note: the stress test scenario is using the advanced GDP release estimate for Q4 2008 of -3.8%, as opposed to the revised estimate of -6.2%. Once again the private forecasts are tracking much closer to the the more adverse scenario than the baseline scenario.
And please don't think Kasriel and Goldman are UberBears. From Paul Kasriel: Light at the End of the Tunnel or an Oncoming Freight Train?
With regard to the economy, we believe there are faint signs of light at the end of the tunnel. Real consumer spending increased by 0.4% in January (and is likely to be revised up) and the decline in February nominal retail sales of 0.1% suggests that the decline in real consumer spending that month will not be severe. For the first quarter as a whole, we now expect a contraction in consumer spending much less severe than last year’s fourth-quarter contraction of 4.3%. Although we do not expect to see outright growth in real consumer spending until the fourth quarter of this year, we believe the deepest quarterly contraction is behind us. With light motor vehicle sales idling just above 9 million units at an annual rate, it appears that for the first time since 1945 there are more used cars and trucks being scrapped than there are new ones getting out on the highways. At some point in the not-too-distant future, the purchases and production of cars and trucks will be stepped up.These are the points I've been making and I also think there is a good chance (better than a coin flip) that GDP will turn slightly positive later this year. However I also think any recovery will be very sluggish.
Even with these "faint signs of light at the end of the tunnel", it appears the "more adverse" scenario is now the real baseline.
WAMU Sues FDIC for $6.5 Billion
Now ain’t this a bitch?
Washington Mutual’s holding company is suing federal regulators for billions of dollars, saying the firesale of the bank’s assets to JPMorgan Chase violated its rights. The lawsuit was filed Friday in federal court against the Federal Deposit Insurance Corp., which seized the Seattle-based savings and loan in September. It was the largest bank failure in U.S. history.
Lawyers for the holding company, Washington Mutual Inc., argue that the bank was worth more than the $1.9 billion JPMorgan paid for it in a deal arranged by the FDIC. The lawsuit argues that if WaMu’s assets had been liquidated prudently, they would have been worth more than that.
An FDIC spokesman did not immediately return a call seeking comment Saturday.
At what point do you just liquidate every last one of these sons of bitches — and throw their management in jail?
>
Sources:
Washington Mutual sues FDIC for over $13 billion
Reuters, Sat Mar 21, 2009 1:49pm EDT
http://www.reuters.com/article/newsOne/idUSTRE52K1K620090321
WaMu holding company sues FDIC over bank seizure
AP, Sat Mar 21, 7:05 pm ET
http://news.yahoo.com/s/ap/20090321/ap_on_bi_ge/wamu_lawsuit
A Lynch Mob!
David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).
~~~
A Lynch Mob!
March 21, 2009
“Let’s go hang ‘em.”
American history is replete with examples of lynch mobs taking control of a situation and inflicting injustice. In the end most lynch mobs have dealt harmful blows to society. Congressional action to punish AIG employees over the bonus issue is already seeding that outcome.
Members of the US House of Representatives who voted for this bill said they were reacting to the anger of their constituents. In failing to show leadership they have just undermined the entire structure designed to repair the financial system.
Specifically the House did the following:
1. They licensed the abrogation of contracts. Their message is simply that it makes no difference what rules we put into effect now; we can and will change them so you cannot depend on them. Global businesses take heed: Your previous judgment about the sanctity of US law has been rendered faulty by our political leadership.
2. They passed retroactive taxation. Their message is that, whatever you plan with regard to the federal tax code, do not assume consistency and do not build any reliability about your government into your decision making. We, in Congress, can reverse our laws and confiscate your results.
3. They made the tax punitive. A 90% tax on something is like taking all of it. The chairman (Rangel) of the House taxation committee actually admitted that by taxing the 90% he was leaving the remainder for the states. In other words, states are now encouraged to engage in the same form of behavior.
Sure citizens are outraged over the $165 million in bonus payments to AIG staff. But they should direct their outrage at the Congress and not threaten the employees or their families with personal injury. The Congress authorized these payments; Dodd, Geithner, and Obama Administration personnel admitted that. Remember, the law passed without giving anyone the chance to testify in public hearings and without allowing comment on the draft legislation. When the law originally went through the Congress, the House leadership suppressed amendments. This Barney Frank and Nancy Pelosi-led House is especially guilty of ignoring the rule of law. They are now guilty of encouraging the rule of lynch mob.
The result of this House action is already damaging. The federal regulator of Fannie Mae and Freddie Mac has shown the courage to ask that this law not be advanced in the Senate. We expect to hear more from those federal personalities who have the strength to speak up and oppose this House-approved proposal.
But depending on the Senate to soften the law or depending on the US Supreme Court to overturn it is a dangerous strategy. Some Congressmen admitted privately that they voted in favor because of constituent pressure, even though they were really opposed to the concept. They voted “yes” because they were relying on the Senate or the courts to say “no.”
Some damage is already done. Firms that were gearing up to participate in the federal program to be announced this coming week are considering withdrawal. They fear that any action which puts them into the federal assistance plan will subject them to the chance of retroactive punishment and taxation. The House has undermined the so-called public-private partnership designed to help restore financing of consumer items like automobiles and credit cards. We expect that the participation in the program to be announced this coming week will be tepid at best.
At Cumberland, we are advising institutional clients to take great care when engaging in any form of activity with the federal government. Simply put: a lynch mob can turn on you in a second and cannot be trusted. The risk is now very high.
Other firms that are already acting with TARP monies, or other federal monies for that matter, are seeking ways to deleverage and exit. In the entrepreneurial and risk-taking business and financial community the universal response to this act by Congress is outrage and distrust and disgust.
So far President Obama is silent on this lynch-mob approach. He has yet to declare himself against it.
Obama needs to be reminded of a parallel in history. A century ago a man named Leo Frank was lynched in Georgia for a murder he did not commit. Local politicians supported the lynch mob; those courageous politicians that opposed it were voted down. Frank was an innocent victim. His subsequent posthumous pardon did not undo the harm.
A century later a man named Barney Frank brags about the earmarks he obtained for his Congressional district (see his website). This modern Frank foments the modern-day version of a lynch mob. The House of Representatives and the Financial Services Committee under the leadership of Barney Frank have made the first day of spring, 2009 a sad day for America. They suppressed the rule of law; they chose the rule of the lynch mob; they are now going to have to live with that result.
When the citizens of America realize what the House has done, they may redirect the lynch mob against the Congress. That is coming next. As Yogi Berra said: “This ain’t over till it’s over.”
~~~
We fly to Europe in a few hours and will chair the Global Interdependence Center delegation at the Paris conference next week (see www.interdependence.org ). Meetings will include central bankers, global investors, and businessmen. Our private roundtable will now also address this House action and what it means for US policy and American markets. Current scheduling from Paris includes CNBC on Monday at 10 AM New York time and again on CNBC on Tuesday morning at 5 AM New York time.
David R. Kotok, Chairman and Chief Investment Officer, email: david.kotok@cumber.com
Investigating AIG
Everyone seems to be all abuzz about the Mike Taibbi takedown of AIG in Rolling Stone. Its a fun read — as is any piece that begins “we’re officially, royally fucked” — but there are a few other columns that do an excellent job contextualizing 1) How AIG got so heavily involved in CDOs and CDSs, and 2) What its going to take to clean up the ginormous mess they made.
If you are interested in learning the nitty gritty details about how AIG’s Financial Product division (AIGFP as it came to be known), then the place to start reading is the 3 part series WaPo did in the fall: Investigating AIG (full linkage below).
The clean up half of the story is best described by Carol Loomis in this month’s Fortune. (She makes it pretty clear that Liddy is not the bad guy).
Get crackin’ . . .
Investigating AIG: The Washington Post
Part I: The Beautiful Machine
Part 2: A Crack in the System
Part 3: Downgrades and DownfallsAIG’s rescue has a long way to go
Carol J. Loomis
Fortune DECEMBER 29, 2008: 10:46 AM ET
http://money.cnn.com/2008/12/23/news/companies/AIG_150bailout_Loomis.fortune/index.htmBehind Insurer’s Crisis, Blind Eye to a Web of Risk
GRETCHEN MORGENSON
The New York Times, September 27, 2008
http://www.nytimes.com/2008/09/28/business/28melt.html
The Big Takeover
MATT TAIBBI
Rolling Stone Mar 19, 2009 12:49 PM
http://www.rollingstone.com/politics/story/26793903/the_big_takeover
Nouriel Roubini: The 2009 TIME 100 Finalists
AGE: 49 OCCUPATION: Economics professor PREVIOUS APPEARANCES ON THE TIME 100: 0 PRO: He warned of a subprime meltdown as early as 2006, and the thoroughly spot-on, reliably depressing predictions that followed have made him one of the most sought-after prognosticators in the country. CON: Presumably not much fun at parties. Late Night Music: "Hey Paul Krugman"
"And for those of you wondering about yours truly — I’m temperamentally unsuited, have never had any desire for the job, and probably have more influence as an outside gadfly than I ever could in DC."
Paul Krugman on the possibility of being appointed Treasury Secretary, Nov 26, 2008
Credit Unions, Bank Failures, and More
Regulators swoop and seize,
None "too big to fail".
by Soylent Green Is People
A couple of key points: these "corporate credit unions" don't serve the general public, and all "natural person" credit union money held at these corporate credit unions was guaranteed earlier this year.
From the WSJ: U.S. Seizes Key Cogs for Credit Unions
The affected institutions don't serve the general public. They provide critical financing, check clearing and other tasks for the retail institutions. These wholesale credit unions, known in industry parlance as corporate credit unions, are owned by their retail credit-union members.And from the NCUA January letter to Credit Unions:
Offering a temporary National Credit Union Share Insurance Fund (NCUSIF) guarantee of member shares in corporate credit unions. The guarantee will cover all shares, but does not include paid-in-capital and membership capital accounts, through December 31, 2010. This guarantee is the equivalent of full share insurance on member shares and will be extended beyond that date by the NCUA Board if necessary.So the natural person credit unions (the ones that serve the public) have had their money guaranteed.
Still the losses will be huge:
[Michael E. Fryzel, chairman of the National Credit Union Administration, the industry's federal regulator] said NCUA's latest estimate is that wholesale credit unions will eventually have to realize between $10 billion and $16 billion in losses on their holdings. The agency on Friday also raised its estimate for what these losses will cost its insurance fund, to $5.9 billion from the prior $4.7 billion estimate.
The federal government will announce as soon as Monday a three-pronged plan to rid the financial system of toxic assets, betting that investors will be attracted to the combination of discount prices and government assistance.
Banks Leaving Money on the Table "All Day Long"
If you missed this, Zach Fox at the North County Times had an incredible story: HOUSING: Banks selling properties in bulk for cheap
For example, a unit of Citigroup, the troubled financial giant, sold a foreclosure in Temecula to an Arizona investment firm for $139,000 when comparable homes in the area were selling for $240,000 to $260,000.Citi just left $100,000 on the table.
The firm listed the home for $249,000, received multiple offers and the property has entered escrow, said Amber Schlieder, the real estate agent who handled the listing.
I hear stories like this all the time.
Here is a short video from KCET with a couple more examples (these are short sales):
Clearly the banks are overwhelmed and the process is broken. Maybe there is an opportunity here for added transparency ...
Solving the Housing Crisis
This last Tuesday the Wall Street Journal published an op-ed by my friend Gary Shilling and Richard LeFrak. They offer a simple solution for the housing crisis: give foreigners who will come to the US and buy a home resident status (green cards). This is a very important proposal and one that deserves national attention and action. Gary was kind enough to send me two lengthier white papers offering more facts. In this week’s letter we are going to look at this proposal in more detail than the small space that an op-ed can offer. And while this letter will be somewhat controversial in some circles, I ask that you read it through, giving me the time to make the case. I will also add a few thoughts as to why this could not only help solve the housing crisis, but help put the nation back into growth mode.
Long-time readers know that I have been growing more and more bearish of late. I have been writing for a long time that we are in for a long period of slow Muddle Through growth as the twin crises of the
housing bubble and credit bubbles require time to heal. Today we look at a serious proposal for cutting the time to healing for at least one of those bubbles (housing), and at least keep the other (credit) from getting worse. This is the most serious idea I have seen that could actually make a realpositive contribution to the economy and help put us back on a growth path.
I will post Gary’s papers and a link to the actual op-ed piece for those who want to do further research, but let me make one point at the beginning that he did not emphasize: the US is already allowing roughly 1 million immigrants a year into the country (which for a variety of reasons I and most serious economists of all stripes believe is a very good thing). We are suggesting that we simply change the nature of what constitutes the conditions for acceptance, so as to jump start the housing industry and the economy. We are not suggesting additional immigrants, although nothing would be wrong with that. I will also post a link for you to send this e-letter to your congressmen and senators.
Let me put up front a few benefits of a program that would allow legal status to immigrants buying a home. Housing values would stabilize and in many cases rise. The massive losses because of bad loans that are being subsidized by US taxpayers would be stemmed, saving many hundreds of billions, if not a trillion or more dollars. The excess inventory of homes would quickly disappear and the millions of jobs that were lost as home construction fell into a deep depression would come back. If housing values rise, many families would be able to refinance their homes at lower rates and have more income left over after paying their mortgages. $12 billion in commissions would end up in real estate agents’ pockets, helping a very battered and bruised group. Hundreds of billions will flow into local businesses, as these new immigrants will need to furnish their homes. This could mean as much as a half trillion dollars in sorely needed stimulus in the next few years, without one penny of taxpayer money and actually adding taxes back to governments from local to national. And we are not bringing in 1 million foreigners, we are attracting 1 million mostly middle-class new Americans, which, if we are smart in how we do this, will result in more jobs for all Americans. So let’s jump right in and look at the details.
Housing Could Drop Another 20% in Pricing
Let’s review the situation as it will be if we do nothing. Shilling shows that we built 6.7 million more homes in this country between 1996-2005 than the normal trend would have projected, partially because we underbuilt the decade before that. New housing starts average about 1.5 million in normal times but have
fallen to 500,000 recently, and could fall further as unemployment rises and demand declines. Even so, Shilling estimates that we still have about 2.4 million excess homes.
This compares rather well with estimates by independent analyst John Burns, which I cited in the e-letter early last year. What they both agree on is that it will take at least until 2012 to work through this excess inventory, and that assumes that foreclosures do not increase as housing prices drop.
Excess supply of anything means lower and continuously falling prices, and that has certainly been the case in housing. Here is what Shilling writes:
“We believe that if nothing is done to eliminate surplus housing, prices will fall another 20% between now and the end of 2010 for a total peak-to-trough decline of 37% (Chart 1 below). The resulting further negative effects on the economy will be devastating. At that point, almost 25 million homeowners, or almost half the 51 million total with mortgages, will be underwater… That’s also a third of the 75 million total
homeowners, with the remaining 24 million owning their houses free and clear. It would take a little over $1 trillion to reduce their mortgages to the value of their houses, compared to $449 billion for the almost 14 million currently underwater.”
This is not inconsistent with similar projections by other acknowledged experts and independent analysts like John Burns and Professor Robert Shiller of Yale. If nothing happens to stimulate buying, there is a great deal more pain ahead for American homeowners.
For the great majority of Americans, their homes represent the largest portion of their assets. This is particularly true of Americans of more modest means, who have been hit the hardest. Watching their single biggest assert drop another 20% will be devastating and for many will mean they will not be able to retire
as they had planned. More Americans own homes (68%) than own stocks (50%). This helps explain a recent poll which shows more Americans are worried about house prices than about the decline in stock prices.
Falling home prices means that consumers have to save more for retirement, which results in lower consumer spending, which translates into lost jobs and more homeowners coming under stress — a vicious spiral that is increasing unemployment. Realistic estimates of unemployment rising to over 10% within the year abound.
Two years ago I and a few others foresaw the current housing crisis (and an accompanying credit crisis), predicting a protracted recession and a slow, multi-year Muddle Through recovery. Sadly, I was right about the housing crisis. Without some intervention, there is little to suggest that the prediction of a long, protracted recovery will not come true.
Lowering rates, as is being discussed in various circles, will help homeowners who can make their payments, but it does nothing to really bite into excessive inventory. Until we reduce the inventory, housing prices in many neighborhoods all across America are going to continue to come under pressure. And as Barry
Habib points out, while the Fed may be lowering rates for securitized packages of loans, those low rates are not available to the average home buyer. The cost of packaging and securitization adds considerable cost.
Shilling discusses the “traditional” options for reducing home inventories, but in the end there is no real solution other than time, or massive amounts (read trillions) in taxpayer money being given to homeowners, which will be very unpopular, as homeowners who were responsible and are paying their mortgages would get no benefits. Waiting another two and a half years for the excessive inventory to sell will keep this country in a very slow or no-growth economy, and devastate the wealth of millions of homeowners.
But there is a solution. There are millions of foreigners throughout the world who would like to come to live in the US. In 2006, there were 1.1 million immigrants allowed into the US, some 63% of whom were allowed in simply because they already had relatives here. Only 13% of visas were granted to people because of their skills. While allowing relatives of current residents to come to the US may be a humane and reasonable policy, it does nothing to assure they bring more than that relationship to help them make their way in the US.
Buy A Home, Get a Green Card
What if we changed the rules for a few years? Starting as soon as possible, we should allow anyone to come into the country who would buy a home. They would be given a temporary visa which would become permanent if they had no problems after, say, five years. While Gary proposes that they be allowed to borrow against the value of their homes, I lean toward suggesting that initially we take those who buy their homes outright (with a few exceptions). That means they have enough capital to purchase a home to begin with, which probably means they are educated and have skills. In fact, if they have enough cash to buy a home, that means they would have more actual savings than most US citizens. We would be attracting future citizens with the capital to invest in job-creating businesses and/or who have useful skills to assist in
the recovery of the US economy.
Of course, there should be some rules that go along with this proposal. Background checks and references should be required. The home could not be rented for a period of time (at least two years), to help reduce the supply of available housing, and could not be resold for at least two years unless another home was purchased. There should be a minimal price, which could be somewhat different for various regions, but
$100,000 would seem to be a good minimum for most areas, with higher minimums in certain areas.
The immigrant should demonstrate the ability to support himself and his family for a period of time (at least one year, preferably two), including the purchase of health insurance. Cash or letters of credit or other guaranteed commitments would be required. Only immediate family members (spouse and children) would be allowed to come with the immigrant. Cousins and siblings must buy their own homes. The permanent
visa should be contingent on not having gone on welfare or public assistance at any time in the past five years. We are trying to solve a housing problem, not looking to create others. I would make an exception in having 100% financing for immigrants with advanced degrees or special skills, especially those who did their schooling in the United States. If the US is to remain competitive in an increasingly technological world, we need more scientists and engineers. But getting permission to stay is becoming increasingly difficult. We are seeing a brain drain of those who would like to stay and create new jobs and technologies (and buy houses) here in the US.
Shilling and Le Frak write:
“The authors of this report believe
that a number of people have given up waiting for those visas or don’t want to
put up with the hassle and are leaving the country. This “brain drain” is
unfortunate since many of these foreigners are highly productive. In 2006,
foreign nationals residing in the U.S. were named as inventors or co-inventors
on 25.6% of the 42,019 international patent applications filed from this
country, up from 7.6% in 1998. Studies of the authorship of academic papers
show the same trend.
“U.S. educational institutions are
considered the best in the world by many and are magnets for foreign students,
especially at the graduate level. Many of them are inclined to settle and work
in this country after completing their studies, if they can obtain permanent
resident status.
“The Council of Graduate Schools
survey revealed that in the fall of 2007, 241,095 non-U.S. citizens were
enrolled in graduate programs. Technological progress and the productivity it
generates depends on people educated in biological sciences, engineering and
physical sciences, but only 16% of U.S. citizen graduate enrollment was in
these three disciplines. In contrast, 55% of total non-U.S. citizen enrollment
was in those fields. Conversely, 53% of graduate enrollment by Americans was in
education, business and health sciences while those three fields accounted for
only 24% of foreign graduate students.”
(There is a great deal more background
detail in the second white paper. See link below.)
Much can be
learned from similar programs already in place in immigrant-hungry countries
such as Canada, Australia, and New Zealand. The United Kingdom has recently
added new programs. Many countries realize that in the coming years there is
going to be increasing competition for the best and brightest of the world.
Again, there are more details in the white papers, but let’s turn to the
effects that would result from such a program.
A Real
Stimulus Package
First, upon Congressional
approval, it would almost immediately stop the seemingly inexorable slide in
house prices, as initial demand would be significant. Let’s assume one million
new immigrants would buy homes. At an average price of almost $200,000, that
would be $200 billion injected into the economy. And each of those homes has to
be furnished, food has to be bought, clothing will be needed, local taxes will be
paid. Airplane tickets to research potential areas, hotels needed during the
interim period, and other related expenditures would add up. Over two years,
this could easily be another $100 billion.
Couple 1
million new buyers with current US demand, and the excess inventory would be
worked through within a year, and possibly faster. This puts a floor under the
housing market, and home values could once again to begin to rise in line with
a growing economy.
Such a program
would have a salutary effect on the value of the dollar, as not only the
initial purchases of homes and materials would need to be converted to dollars,
but it is likely that immigrants would bring even more capital into the
country.
By stemming the
fall of home values, it would decrease the likelihood of foreclosures and help
homeowners get refinancing at lower rates. Refinancing now is difficult because
most lenders want a substantial slice of equity to go along with any new
mortgage. If your home value has dropped 20% and is likely to fall another 20%,
it is hard to have enough equity to qualify for a new mortgage. Stopping the
fall in prices is critically important; and maybe if prices rise in some areas,
homeowners will be able to refinance at better rates, giving them more cash
each month to save or spend.
As I have
written in previous letters, the psyche of the American consumer is permanently
scarred. We are on our way back to a savings rates that will look more like
1987 than 2007, when it was almost zero. Just a few decades ago, we saved
7-10%. Consumer spending was only 64% of US GDP in 1987. It was 71% in 2007. It
is on its way back to that lower level.
Lower consumer
spending will be a drag on growth for years. But bringing in 1 million already
middle-class new immigrant families will help make up for a lot of that reduced
spending. If you can spend $200,000 on a home, you are likely skilled at
something and well-educated. You will find a job, or create one, as many
immigrants do, and then you will add to our total consumer spending.
If you are a
real estate agent, you should love this proposal, as it would result in an
additional $12 billion in commissions.
If you are a
home builder, what a great way to reduce inventory and get back to the
conditions where there is a demand for your product. This would help put back
to work those who have lost their jobs in the home construction collapse. Home
Depot and Lowe’s and local stores? It would help them to increase sales, which
leads to more jobs.
We are on the
cusp of the Baby Boomers beginning a huge wave of retirement, both in the US
and elsewhere in the developed world. There is going to be a need for skilled
workers to replace those Boomers, as well to provide services to the retirees.
Further, the promised Social Security and Medicare expenditures are going to
start increasing at a significant rate. We are going to need immigrants to help
pay for those benefits. Given the controversy over immigration, we will look
back with some irony in ten years when we find we are in a serious competition
with other nations to attract skilled immigrants. We should start now. I think
the concept is, let’s not waste a good crisis.
Let’s look at
some of the potential critics of this proposal. I was on Yahoo Tech Ticker yesterday talking about
this, and got a few irate emails and phone calls.
“Why,” I was
asked, “do I hate American workers? Isn’t there enough unemployment? Why do we
need more immigrants taking American jobs?” And there was considerable angst
about illegal immigrants.
First, I am
suggesting we transform the already existing legal immigrant flow, which is
going to happen anyway, into a form which helps us solve a major crisis. I am
not talking about adding another 1 million immigrants on top of the current
legal inflow. Just change the nature of that inflow until the excess housing
inventory is settled, and then we can go back to the current program, if that
is what is wanted (more on that below).
Second, I am
not suggesting we bring in or condone illegal immigrants. That is another issue
altogether, for another debate at another time.
If we do
nothing, unemployment is going to rise to at least 10%. That is certainly not
good for the American worker. Home values are going to continue to fall. That
is certainly not good for the American worker. The economy is likely to be
stagnant for an extended period of time, which means job growth in a Muddle
Through recovery will be slow and stagnant. That is not good for the American
worker.
Hundreds of
billions more of taxpayer dollars will have to go to banks to keep them solvent
as falling home prices and increasing unemployment increase foreclosures. That
is not good for the American worker and taxpayer.
And further, I
am not talking about bringing 1 million foreigners to this country. I am
talking about bringing 1 million future Americans, who want to work hard and
live the American dream.
Let me say a
few words to those who are opposed to immigration — and I have heard from
you. With few exceptions, US citizens reading this have an immigrant in their
genealogies. Some of mine go back to the 1600s. Some of mine were not exactly
considered welcome. “No Irish and Dogs allowed” read the signs. But immigrants
and their children have been the driver for growth in this country for
generations. It is hard-working immigrants who leave their homes for the dream
of being Americans that have been the backbone of the building of the nation –
the hewers and shapers, if you will.
It is precisely
that melting pot of human diversity that is the strength of the American idea.
Each new wave of immigrants has been viewed with trepidation or scorn, yet
within one generation they have become American. And in turn, their children’s
children forget that their forebears had to deal with discrimination.
America –
the US — is not so much a country as it is an idea, the idea that anyone,
regardless of race or religion or gender, can come here and with hard work and
determination make their own way. Some end up owning the local deli, and some
end up founding Google. Some 25% of Silicon Valley start-ups, I am told, are by
immigrants, creating jobs at the bleeding edge of technology. They see the US
as a land of opportunity. That is why so many want to come and that is why we
can attract a new generation of affluent, self-reliant immigrants who can help
us solve a problem that we created.
I
can see no downside to changing our immigration policy for a few years. We
solve the housing crisis, stabilize home values, brings hundreds of billions in
stimulus to the US, and with no taxpayer outlay. For a short time, we
substitute one class of immigrant for another, to solve a serious crisis. It is
not a matter of immigrants or no immigrants, just which immigrants
So
which do you want? 10% unemployment and a decade of lower home values and
increasing foreclosures, with a slow, Muddle Through, jobless recovery, or a
stable housing market and home construction back to trend?
If
you agree with me, I suggest you contact your Congressman. You can go to
http://www.visi.com/juan/congress/
(selected at random from many such sites) and type in your address and get the
name of your congressperson and senators. Just tell them you like this idea,
and cut and paste the link where you read this into the letter. And tell them
to get into gear! I would like to point out that this proposal is not Republican or Democrat, it is just common sense.
I hope we can get broad bipartisan support.
The link to the Wall Street Journal editorial is:
http://online.wsj.com/article/SB123725421857750565.html
The links to the white papers are:
http://www.frontlinethoughts.com/pdf/Housing_Whitepaper_1.pdf
http://www.frontlinethoughts.com/pdf/Housing_Whitepaper_2.pdf
Las Vegas, La Jolla and the OC
I
expect I will get a few new readers from this letter. Normally, at the end of
my regular weekly letter, I make a few personal comments. I write this free
weekly letter to my 1 million closest friends, and you can add yourself to the
list at
www.frontlinethoughts.com.
You can find out more about me at
www.johnmauldin.com.
Parts
of this letter have been written in New York and Dallas, and as I write this I
am on a flight to Las Vegas to speak at a conference on natural resources. I am
sure the recent Fed actions will be at the center of conversation. There is not
enough space now to comment on that; but I did do a few segments on Yahoo Tech Ticker (one of which evidently made
the Yahoo home page), which you can listen to at the following links.
Links to the Yahoo segments:
D.C. to America: You Can’t Handle the Truth
http://bit.ly/10rUiF
Plan to Solve Crisis: Let Immigrants Buy Houses
http://bit.ly/W0XLq
Fed Strategy: Spread Economic Pain Over Multiple Years
http://bit.ly/wgGjA
I will be in La Jolla for my annual
Strategic Investment Conference in two weeks, as well as hosting the Richard
Russell Tribute Dinner. The dinner is shaping up to be a big event, with hundreds
of attendees and many of the brightest lights in the investment writing world present
to honor Richard for 50 years of brilliant commentary.
I
really enjoyed my trip to NYC. I had a great steak dinner with Art Cashin,
everybody’s favorite commentator on CNBC. Breakfast with Tom Romero and then a
meeting with Jim Cramer, who I found to be very personable and genuinely
likeable. Meetings in the afternoon with business partner Steve Blumenthal,
then breakfast the next day with Barry Ritholtz, Yahoo at the NASDAQ, and then
a speech at noon, back on the last flight and up writing — and then this
plane, which I hope ends up in Las Vegas.
In addition to being with old
friends Doug Casey and David Galland (and their posse), I intend to see the
inside of the gym and spa. I need it. Tiffani has been gone for two weeks,
working on our book, and will get back on Monday; and the new chapter I was
supposed to have for her has disappeared in a reboot from this laptop. I am
quite distressed, but evidently the book gods decided it needed a major rewrite.
Have a great week, and find a few
friends and share some laughs and your adult beverage of choice.
Ok, the computer crashed again, and
this letter is going out on Saturday rather Friday night. But I did get to see the
Jersey Boys (The Story and Music of Frankie Valli and The Four Seasons) here in Vegas last night. One of the best shows I have seen in
years. See it when it comes near you.
And if you are in Las Vegas, eat at
Wolfgang Puck’s new place, called Cut. One of the best pieces of steak I have inhaled
in years. And now it really is time to hit the send button and go attend the
conference.
Your wondering if we can actually get some action analyst,
John Mauldin
Copyright 2009 John Mauldin. All Rights Reserved
If you would like to reproduce any of John Mauldin’s E-Letters you must include the source of your quote and an email address (John@frontlinethoughts.com) Please write to Wave@frontlinethoughts.com and inform us of any reproductions. Please include where and when the copy will be reproduced.
John Mauldin is the President of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS) an NASD registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.
Stress Test, Quarterly Forecasts for Unemployment and GDP
Earlier I posted the publicly released economic scenarios from the Supervisory Capital Assessment Program (bank stress tests).
The following graphs shows the stress test economic scenarios on a quarterly basis as provided by the regulators to the banks as part of the FAQs (no link). I've also added the most recent forecasts from Paul Kasriel at Northern Trust, and from Goldman Sachs (no link) for comparison.
The first graph is for the unemployment rate through 2010. This is a quarterly forecast - the January unemployment rate was 7.6% and February 8.1%.
Click on graph for larger image in new window.Although the two private forecasts don't include all of 2010, it appears that both the Kasriel and Goldman forecasts are near the "more adverse" scenario for 2009.
The second graph makes the same comparison for changes in real GDP.
An interesting note: the stress test scenario is using the advanced GDP release estimate for Q4 2008 of -3.8%, as opposed to the revised estimate of -6.2%. Once again the private forecasts are tracking much closer to the the more adverse scenario than the baseline scenario.
And please don't think Kasriel and Goldman are UberBears. From Paul Kasriel: Light at the End of the Tunnel or an Oncoming Freight Train?
With regard to the economy, we believe there are faint signs of light at the end of the tunnel. Real consumer spending increased by 0.4% in January (and is likely to be revised up) and the decline in February nominal retail sales of 0.1% suggests that the decline in real consumer spending that month will not be severe. For the first quarter as a whole, we now expect a contraction in consumer spending much less severe than last year’s fourth-quarter contraction of 4.3%. Although we do not expect to see outright growth in real consumer spending until the fourth quarter of this year, we believe the deepest quarterly contraction is behind us. With light motor vehicle sales idling just above 9 million units at an annual rate, it appears that for the first time since 1945 there are more used cars and trucks being scrapped than there are new ones getting out on the highways. At some point in the not-too-distant future, the purchases and production of cars and trucks will be stepped up.These are the points I've been making and I also think there is a good chance (better than a coin flip) that GDP will turn slightly positive later this year. However I also think any recovery will be very sluggish.
Even with these "faint signs of light at the end of the tunnel", it appears the "more adverse" scenario is now the real baseline.
WAMU Sues FDIC for $6.5 Billion
Now ain’t this a bitch?
Washington Mutual’s holding company is suing federal regulators for billions of dollars, saying the firesale of the bank’s assets to JPMorgan Chase violated its rights. The lawsuit was filed Friday in federal court against the Federal Deposit Insurance Corp., which seized the Seattle-based savings and loan in September. It was the largest bank failure in U.S. history.
Lawyers for the holding company, Washington Mutual Inc., argue that the bank was worth more than the $1.9 billion JPMorgan paid for it in a deal arranged by the FDIC. The lawsuit argues that if WaMu’s assets had been liquidated prudently, they would have been worth more than that.
An FDIC spokesman did not immediately return a call seeking comment Saturday.
At what point do you just liquidate every last one of these sons of bitches — and throw their management in jail?
>
Sources:
Washington Mutual sues FDIC for over $13 billion
Reuters, Sat Mar 21, 2009 1:49pm EDT
http://www.reuters.com/article/newsOne/idUSTRE52K1K620090321
WaMu holding company sues FDIC over bank seizure
AP, Sat Mar 21, 7:05 pm ET
http://news.yahoo.com/s/ap/20090321/ap_on_bi_ge/wamu_lawsuit
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