The term “Black Swan” is used far too often in today’s discussions about the financial markets and it pertains to unforeseen events that cause havoc on the economy or the markets themselves. Last year was called a “Black Swan” event even though the warning signs were there for at least a year, some say since 2006. In today’s discussion the news coming out of Dubai is being hailed as another Black Swan event as they are talking about delaying payment on some of their debt on December 14th.
The events in Dubai is the furthest thing from a black swan event as we have all known about this problem for the better part of 6 months or more. The country is in poor financial shape and is, basically, insolvent without a bailout from its neighbor Abu Dhabi, the rulers of the two nations are related. I would be willing to bet that the bailout will come in some fashion, but only after an example is made of the smaller nation, but is this a black swan event? What is more a more relevant question is will a technical default on Dubai’s debt be a trigger for something bigger?
I do not believe that the Dubai situation is a black swan event as it was a known situation for some time and those who lent the country money knew they were way over leveraged and lent that money at their own risk. Whether or not this default, if it actually happens, will lead to other events, a domino effect if you will, remains to be seen. Since the sub-prime situation led to a domino effect in the mortgage market it is safe to assume there will be some fallout from a sovereign default somewhere along the way. Considering Mexico was downgraded to BBB and Vietnam raised interest rates and devalued its Dong by 5% there are definitely trembling in the FX markets that cannot be ignored.
The effects of these issues are unknown to me at this time because I do not know how China will respond, although I have my speculations, nor do I know what exposure US or European banks have to the Middles East at this stage of the game. I am willing to bet their exposure, especially JP Morgan, BoA and Citi, is much higher than we all think at this stage of the game since interest rates in that area of the world are much higher than the “norm” in the US and Western Europe. However, the real black swan events that I think are being ignored are the ones in Eastern Europe where currency devaluation and real sovereign default is actually happening and has been happening for some time now. Not that you ever hear about that from the media, but read about it sometime in European blogs or news outlets and it is disturbing.
Basically, I believe the greenback will have the stay of execution I have been expecting for some time now and it should rally nicely on this possible default news. In reality a Dubai default means very little to the US other than it is a sovereign nation defaulting, but it will trigger a flight to quality which means if the dollar equity trade is intact the market could be in real trouble. Further pressure for the greenback is coming from Japan who said it was concerned over the Yen’s strength last night in a Bloomberg story. This is an issue I wrote about a day ago as well, but essentially the Yen is up about 8% against the USD which is an issue for the Japanese since they export more goods than they import. A strong Yen is not good for them as it means their products will be more expensive in the US and China, expect to see Japan intervene in the FX markets to strengthen the USD/JPY pair, IMHO.
This puts the US at odds with its trading partners because while we talk like we want a strong currency we do not. A weak currency means we make our products cheaper overseas, narrow our trade deficit and essentially boost our GDP in a very phony way. As an aside it also makes corporate profits look fantastic if they generate any overseas business as a weak dollar means they can sell the same amount, or less in fact, and when those earnings are turned over to US dollars it looks like sales increased when they did not, Houdini earnings! We will have to see who’s will is stronger, the will of investors who are about to flee to the USD for protection which will surely drive up the USD or Helicopter Ben and our Congress hell bent on devaluing our currency to pay for their crazy social engineering and to make it look like they are leading us to recovery when they are really leading us to a Zimbabwean fate.
First, let us clear something up, health care reform is totally different from the monstrosity that is currently in front of the Senate at this moment. Health care reform would mean that the government would be telling insurers that they could no longer discriminate against preexisting conditions, annual and lifetime caps would be removed and insurers would lose their federal exemption from anti-trust laws. Health care reform has nothing to do with a public option, period. The current mess in congress does reform some of those issues I mentioned, but not all of them and it creates far more damage to the system than it will solve.
Now, this is an issue near and dear to my heart as someone with cancer and who desperately needs his health coverage that I currently have. I am not the only one in this position, as I am sure you can imagine, and there are millions like me out there who are waiting to see how Congress will screw this issue up for us. Here is what I foresee happening in the near-term and how a death sentence will be issued to many people like me.
Congress will pass this budget busting, horrible health care package that will help the most destitute of Americans, who already qualify for Medicaid or similar programs I might add, and will immediately drive up the cost of existing plans to people like me who already pay through the nose for health care coverage. Once this thing passes my monthly premiums will jump from $1,200 a month to $2,000 or more a month because insurance companies will be out of business starting in 2014 when the public option, i.e. socialized health care, begins. This will make health insurance unreachable for most Americans and small businesses putting people like me at risk of dying because I will not be able to afford health insurance, the irony.
Let’s not forget that I will have a “Cadillac” plan, because that is what NY makes you have, so add another 40% tax to my premium and if I make $250K a year add another tax to my income tax, on top of my already high taxes, and how am I supposed to pay my other bills? It will make very little sense for me to put any effort into anything or to make any money at all if this thing passes. In fact the cross over point is somewhere close to about a third of what I make now so I will literally not have to work in a couple of years and I will end up netting the exact same amount of money and pay less in taxes. I am not the only one figuring this out either, so guess what will happen? All the bad people, i.e. “rich” people, will decide to make less because it is easier and less of a headache which means all those estimates the Senate is coming up with are going to be shot to hell.
The real fun will begin after 2014 when the supposed 31 million Americans, mostly illegal’s from what I can tell, will then flood the doctors’ offices. This is when the fun really begins. We will then have to get used to extremely long waits at doctors’ offices because we have more people with insurance and we will have less doctors because they will be reimbursed less, since it will probably be a Medicare like reimbursement system. Doctors will not stay in this business for the $25-$40 they get reimbursed for government health plans, would you? That means the polls showing that doctors will quite if this nationalized health care plan is approved are probably accurate or at the very least doctors will flock to specialties so you can forget about preventative care or GP doctors.
At this point in time innovation will have stopped because there are going to be taxes on biotech companies and other pharmaceutical companies, read the bill. We will have a health care system exactly like Canada or the UK which by all accounts is great, f you are not sick. If you are sick in those countries you get out and come to, guess where, America, but that will be long gone by 2015. We, Americans, will be flocking to China, India or somewhere else in South East Asia for health care because there will be no waiting, it will be cheaper, the service and survival rates will be better. For the life of me I have no idea why we, the country where other citizens flock to for medical treatment, would revert to a socialized system that is failing other countries not only in terms of their health, but also in terms of their national financial health.
If you think about it who goes to the UK or France to get cured of cancer? I didn’t I went to Boston along with many people from the UK and France. Who goes to Canada for surgery? They come here. The only people who venture to those countries are those who do not have insurance and refuse to pay for anything on their own, which I get that this is an issue, but it does not warrant the US going to socialized health care for 10% of the population. Also, the UK, France, Germany, Switzerland and any other country that offers socialized health care has a debt to GDP ratio that is horrible, worse that ours, but our actual number is that largest of all, so why would we do this at all? We can’t afford this and to think we can is absurd.
We currently owe $12.03T (TreasuryDirect.gov) which is 81% of out GDP and some $3T comes due of the $12T next year. That means we have to fund about $5T in US debt in 2010, depending on how much this wonderful government decides to spend next year, which will be a record, think about that for a minute. We have never done that before and even Moody’s is beginning to doubt the solvency of the US government and now the government wants to add socialized health care to this mess? How in the world can we pay for this? We cannot. Even the Chinese are saying, um, how are you going to pay for this? They, the Chinese, will not show up at some point in time to buy our government paper because they know we will not be able to pay off our debt.
We have yet to even raise our debt ceiling yet from the $12.1T to the $14T we need to raise it to for next year’s deficit spending. Yet our Senators will pass this monstrosity of a bill for the “greater good” of 10% of the population who already qualify for Medicaid, but are too good to apply for it! Then they will wonder why people like me end up losing their insurance next year and rates go through the roof, surely it will because of the big bad insurance company who, by the way, paid for more $10,000 procedures for me than I would care to admit to. This bill not only impacts the insurance industry, but it impacts every American in ways that you cannot imagine from your insurance coverage next year to the very solvency of the country in the next 10 years. This government needs to be stopped before they destroy this country and kill people like me.
According to Ben and now his number 2, Donald Kohn, there are no more asset bubbles in the US, none at all. This is coming from the same Fed that missed the mother of all housing bubbles and continually either lied to themselves or us to the severity of the bubble, when they realized it was busting, after the fact. These are not exactly what I would refer to as credible words of comfort when they messed up so badly to begin with.
However, considering we lost millions of jobs in the last 6 months alone and had horrible economic data all while the stock market climbed an unprecedented 60% from its lows, a feat that usually takes 2 years after a recovery has actually occurred, there is no bubble. Right. In my opinion we went from one horrific bubble, what was the mother of all bubbles, to the greatest ,biggest, most fantastic bubble of all time created by the Fed on purpose. I realize that everyone thinks everything is fine now that the market is up and we had a wonderful 3Q09 GDP figure, which will be revised down to 2.5-3%, that was 110% stimulus induced, and do not fool yourself and think it was not, but things are ugly.
We are still reporting 500K initial claims a week, last month if you look at the official number we actually lost some 276K jobs, the BLS added some 86K via the birth/death model, and unemployment is at 11%+. That’s right, I said unemployment is at 11%+ right now and I can prove it. According to the BLS they understated employment by some 800K in the beginning of this year, this was announced in September 2009 by the BLS, which means we are not counting some 800K people who are unemployed because the BLS fudges the numbers with the birth/death model, go look to see their actual numbers they add in HERE.
My point is that there has never been a point in history where the market climbed 60% from its lows in a mere 6 months while we are still shedding jobs. Given that employment has been overstated, or understated depending on how you look at it, and we have had weak or anemic, albeit better, economic data this equity move is unparalleled and is the basic definition of an asset bubble. Here are 2 other things that should make you say hmm, treasuries are doing very well, still, which is highly unusual in a economic recovery, come on stocks and treasuries can’t both be right, and precious metals are also going through the roof.
It is impossible to have every or virtually every asset class go up and have them all be right. According to the markets, which are horrible future forecasters, see September 2007 Dow 14,000 for proof, we are facing deflation or a continued recession with treasuries going up, inflation with commodities doing very well or a complete economic recovery with stocks and corporate bonds going through the roof. Do you see my point? They cannot all be right, it is not possible. I know I will get hate mail for this next statement, but here it goes, stocks are stupid money and that is a fact. Credit markets and the FX markets are always where the smart money is, hence the reason why those markets dwarf the equity markets. If you think about it you know I am right, stocks are last in line during bankruptcy!
The point I am making is this, equities are for gamblers, like me and probably you. The credit markets represent the smartest of the smartest money and what is that market telling you? Treasuries are saying there are still major problems out there, as they are going up, and corporate bonds are pricing in 2% GDP growth. Stocks, however, are pricing in some 4%+ GDP growth with job creation and even credit expansion, none of which is actually happening in real life. I can talk until I am blue in the face about valuation and such, but it will do absolutely no good because people do what people do, they see stocks go up and jump on at the very end to ride them all the way down.
In fact CNBC stated today that the retail investor is coming into the market now. Why? Because human behavior is predictable. They wait for things to go up and then see their friends buying stocks, making money and feel left out and jump on the bandwagon. I saw this happen in 1999/2000 only to see people get killed when the market corrected, which it will, because when we see the behavior I am talking about it is the sign of an asset bubble. It is what happened during every bubble we have had and then we will look back in a year and say how were these people so dumb to fall for it? For the record, I do not think all people are dumb I just think people make bad decisions based on faulty advice and herd mentality.
I also do not think retail investors are jumping into this market as net flows do not show that type of activity, equities still show net redemptions not in flows, so CNBC is flat out wrong. Oh, there is also no money on the sidelines so just forget about that argument it does not exist. That money is sitting in money market accounts because people want it liquid and/or it is part of an asset allocation. In fact, that money has not moved off the sidelines in 15 years so I highly doubt it will move now. If it did, which it is not, that is further evidence of a bubble driven by cheap money as the Fed is literally forcing people to risk their principle to make any return.
The Fed can say all they want that there is no bubble because you and I know there is a major bubble out there. Well, you should know that unless you think 60% rallies happen all the time in a mature market and economy. I think what the Fed is saying is that there is no bubble in securitization or in the housing market, which is debatable, but there is one heck of a bubble in stocks. The one thing I do know for sure is that all bubbles pop, I just do not know when, but this one will go soon and it will be spectacular.
Who are you kidding? There is no way Pelosi could possibly prove that figure to be accurate and she knows it. Just a few months ago the claim was that the stimulus saved some 150K jobs and a report that was out a few days ago showed some 30K jobs. Not only that, but the claims that only a fraction of the money was spent has been the Democrats excuse for months now given the rising unemployment numbers.
As I stated earlier, if the stimulus was working we would not have seen 53K in government jobs cut last month. What that shows is states are taking stimulus money and using it to shore up their floundering budgets that are failing. In NY alone tax receipts are down some 36% or so which is crippling to the government, they haven’t figured out that higher taxes means people will spend less, go to Indian reservations, out of state or simply move to lower penalty states. Simply put, there is no way to tell if the stimulus is working or not, but if it were working I would think it is a failure given the massive weekly unemployment claims, that’s just my opinion of course.
There are several laughable claims she makes in the video below, such as the unpopularity of TARP will likely not affect the Democrats in 2010, highly unlikely in my opinion. Also, unless we have substantial job growth in the near future then the Democrats are in really big trouble in 2010, not that Republicans are any better, but at least we will have balance in government again. Of course, there was talk about health care and the myth about deficit neutral spending for it, with a public option, which is impossible, and tax stimulus for businesses to spur hiring.
Something tells me that a $3,000 tax credit for hiring new employees will not bring in a lot of new jobs. Especially not meaningful good paying jobs, may be some minimum wage jobs, but not your $200K VP of Marketing jobs. Essentially I believe this video confirms a second stimulus, but not for you or I just for businesses. That may be fine if it jobs, but so far e have spent close to $1T and not too many jobs have been created, so my hopes are not very high. However, they will definitely extend the homebuyer tax credit.
Is extending the homebuyer tax credit a good idea? No, it is not. It is very expensive for the tax payer and many of these loans are FHA loans which require only 3.5% down and they allow you to use the tax credit for the down payment, basically more no money down mortgages. The FHA is rumored to be in need of a $54B bailout in the near future, a claim they have denied, but let’s face it GSE’s of any sort have a terrible history of being honest with anyone. The new tax credit will be available to everyone which will allow an already over indebted America to lever up again, so have at it and let it be known that your government shall not deny you the house of your dreams!
Seriously, this is ridiculous, the market needs to work itself out so let it do its thing. The longer you pump artificial demand into it the longer the pain will be for true price discovery. In other words Nancy, you are creating more pain than is necessary, but keep listening to those Keynesian economists who have been wrong for how many decades now? Never fear, they are from the government and they are here to help…
Since Freddie and Fannie’s demise in September of 2008 Congress has been trying to figure out what went wrong. I guess they forgot how regulators in 2003 said there were significant problems with how they ran their books, but Barney Frank, Maxine Waters and others said that there were no problems and they were financially sound. It is funny how government always forgets how they screwed up, but punishes other companies endlessly on their missteps, especially when they do not donate to their campaigns.
Regardless, we all remember that shareholders were wiped out and the government threw them hundreds of billions in lifelines as the firms were officially insolvent or close to it. Bother firms are still very active in the mortgage market and guarantee $5.3 trillion of the $12 trillion US mortgage market. The primary function of these firms was to make homeownership affordable apparently at any cost.
Unfortunately we are now all paying for those guarantees mostly because of their inability to manage risk, but more because Congress kept pushing them to make riskier loans. At this point arguing who exactly is at fault is irrelevant as these firms are owned by the government and will be, according to Moody’s, in the future.
Here is the good news, these firms did so well that it is likely that another agency will replace them. I assume it is under the same type of quasi government guarantee system that Freddie and Fannie had, but who knows at this stage. This is why government should have no ties with private business because at the end of the day it doesn’t matter if that business was a complete failure since they can just fund, with our tax dollars, another attempt at the same mistake.
It is just unbelievable that the government would be allowed to engineer a replacement for these failed institutions. The reason why the government will not place either of them back in business is because their names are tarnished. I realize that many Americans will have forgotten about the previous failed institutions by the time they re-launch the new entity or entities, but that is still no excuse. I am even willing to bet that they bring back the same management teams because they will have the depth of knowledge and experience they need to run such a large operation.
In a nutshell, we can start over again, take them public and then watch them fail only to have more shareholders wiped out again. I know I am presuming a failure before the endeavor is even tried, but think of it this way, look at all the warnings Congress had and then look at what they did, even after Freddie and Fannie got caught, and then tell me what you think will happen. I can hardly wait for Freddie and Fannie 2.0, it should be a fun ride.
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