Uber-Regulation?
This has been a pretty active week for the markets, consumers and for the fans of Michael Jackson and Farrah Fawcett. The deaths of two 70s/80s icons is painful given the circumstances of their untimely ends. But since this is a finance blog, I'll stick to my knitting.
Over the last several posts I have been discussing how interest rates and the Fed have a direct effect on you. This week, Chairman Ben Bernanke testified about his role in the forced or some say shotgun wedding of Merrill Lynch and Bank of America. There is some shreds of evidence that the CEO of BoA was forced to take the deal even though he (CEO) had doubts and was contemplating getting out of the deal. According to sources, both Bernanke and Paulsen either directly threatened the CEO with being fired or implicitly suggested changes would be made if the merger didn't close. Now what does this have to do with me? If you own BoA stock, you may have felt that the deal at the time was a bad one and didn't realize the CEO was forced to do it. The more scary fact is that there appeared to be heavy government interference in a commercial deal. I am in the camp that we don't need government involved to that depth in business.
This testimony came in wake of Obama and the Treasury's proposal for sweeping overhaul of the financial regulation of the economy. One key request was to give the Fed more power to call the shots on management teams, increase capital requirements and other measures. Another key request was the establishment of a consumer financial protection agency which would have some rule making authority. For people looking to borrow money for themselves and their business, while this extra protection may sound appealing, think again. Banks are heavily regulated to begin with and adding another layer which could cause rule conflicts are not the right answer. I believe innovation will be stifled along with the flow of credit to people and businesses that need it. After 9/11, regulations were put in place in the name of protecting us against terrorism. This law (Patriot Act) was passed without thinking through the ramifications. Again, we have politicians putting things together that are not well thought out.
The mess we are in now was a combination of a lack of regulation and a lack of oversight. IndyMac failed partly due to the lack of oversight of the Office of Thrift Supervision. Fannie/Freddie Mac took on way too much risk because Congress looked the other way. Now, we do have to think about the unregulated credit default swaps that sunk AIG. We don't need czars, uber-regulators and councils of regulators. We need an overhaul of the existing regulators, staff them properly and monitor their performance more effectively.
Now that my soap box has collapsed, what does this have to do with you? If you rely on credit, you have reason to worry. Credit will be even tougher to obtain and with that the growth of the economy will be anemic. That growth puts money in your pocket and provides a better way of life. This is a dangerous time in our history. During times of crisis, we put in safeguards with the best intentions. History has shown us that time and time again, these safeguards hinder innovation and economic growth.
Stay tuned for my next post as I'll venture into the health care plan and the financial impacts for you.
Friday, June 26, 2009
Friday, June 19, 2009
A Week I won't review ad nauseum
I have been saving my energy for my end of week blog. After I was rear-ended in the Kiss & Go line by a mini-van yesterday, I felt it prudent to cool down before I posted.
Last two posts were about inflation and what is perceived, real and mostly the great unknown. The CPI came out this week for May and it represented the largest 12 month drop in 60 years. As you can discern, there are examples of growing energy and food costs but overall there is no "inflation boogeyman" right now. So what gives?
The economy is in tough shape. The job market is still not recovering as people would have you believe. The unemployment rate is around 9.4% and rising. The housing market is not stabilizing quite yet. The media is gloming on any positive news when it comes to existing home sales to new housing starts but its a hollow strategy. The wonderful news that people would have you believe is that mortgage rates are still at historic lows. That is great if you have a FICO score in the 800s and have over 20% down. Hold tight folks on this recovery. We still have a way to go.
Let's not take my word on this inflation issue. This week two Federal Reserve governors spoke about the inflation fears. Both Janet Yellen (SF Fed pres) and Thomas Koenig (KC Fed pres) referred to it in various speeches. For my audience, the Fed presidents often speak in between FOMC meetings (these are the meetings when all the Fed people talk about interest rates and other issues) to either confirm or dispel the key issues of the Fed. Both expressed concern about the rising yields telling the story of a possibly inflationary period. The FOMC is meeting next week. The market will be focused on the minutes of those meetings and what they say.
Now that I have beat this horse for three posts, I'll leave it alone (for a bit). Stay tuned as I'll focus on what the President and the Treasury Dept are proposing in terms of additional regulation. Its very complex but I'll try to glean it down. Have a great weekend! Now onto my damaged car....
Last two posts were about inflation and what is perceived, real and mostly the great unknown. The CPI came out this week for May and it represented the largest 12 month drop in 60 years. As you can discern, there are examples of growing energy and food costs but overall there is no "inflation boogeyman" right now. So what gives?
The economy is in tough shape. The job market is still not recovering as people would have you believe. The unemployment rate is around 9.4% and rising. The housing market is not stabilizing quite yet. The media is gloming on any positive news when it comes to existing home sales to new housing starts but its a hollow strategy. The wonderful news that people would have you believe is that mortgage rates are still at historic lows. That is great if you have a FICO score in the 800s and have over 20% down. Hold tight folks on this recovery. We still have a way to go.
Let's not take my word on this inflation issue. This week two Federal Reserve governors spoke about the inflation fears. Both Janet Yellen (SF Fed pres) and Thomas Koenig (KC Fed pres) referred to it in various speeches. For my audience, the Fed presidents often speak in between FOMC meetings (these are the meetings when all the Fed people talk about interest rates and other issues) to either confirm or dispel the key issues of the Fed. Both expressed concern about the rising yields telling the story of a possibly inflationary period. The FOMC is meeting next week. The market will be focused on the minutes of those meetings and what they say.
Now that I have beat this horse for three posts, I'll leave it alone (for a bit). Stay tuned as I'll focus on what the President and the Treasury Dept are proposing in terms of additional regulation. Its very complex but I'll try to glean it down. Have a great weekend! Now onto my damaged car....
Friday, June 12, 2009
Inflation is there if you only look
In my last post, I opened up a discussion about the potential for a large problem with inflation. The prevailing wisdom out there is that it won't be a problem until next year and in 2011. Here is a wake up call for you. Did you notice that the cost of a gallon of gasoline has gone up? Hey, what happened? Wasn't it only $2.10 for premium not too long ago?
Some people follow this but some don't. The cost for a barrel of oil was really low not too long ago. I recall it hitting in the $30 range recently. This week, that cost was running around $70 per barrel as a lot of investors are flocking to commodities and think China is recovering. Here is where all of this hits you in the pocket. The cost for a gallon of gasoline (at the wholesale level) in mid-February was $1.15. Now that cost has ballooned to $2.05. Where I live I am paying $2.65 for premium. 60 cents is paying for transportation, taxes and other fees just to get the gas to my pump. Inflation is here if you only look. Since its Friday, I'll keep this post brief. Keep an eye out for those prices!
Stay tuned, my next post will continue this discussion and move into other rising costs.
Some people follow this but some don't. The cost for a barrel of oil was really low not too long ago. I recall it hitting in the $30 range recently. This week, that cost was running around $70 per barrel as a lot of investors are flocking to commodities and think China is recovering. Here is where all of this hits you in the pocket. The cost for a gallon of gasoline (at the wholesale level) in mid-February was $1.15. Now that cost has ballooned to $2.05. Where I live I am paying $2.65 for premium. 60 cents is paying for transportation, taxes and other fees just to get the gas to my pump. Inflation is here if you only look. Since its Friday, I'll keep this post brief. Keep an eye out for those prices!
Stay tuned, my next post will continue this discussion and move into other rising costs.
Wednesday, June 10, 2009
Inflation isn't just for balloons
How does inflation affect me? Why is it so important? In my last post, I briefly discussed the increasing yields for Treasury notes and bonds. Those yields, particularly on the longer maturities (5 years plus) are the markets perception of inflation.
Inflation, as measured in the government's monthly reading called the consumer price index, is basically rising prices. Ever notice that when you didn't get a raise, you actually do get a "cost of living" raise? That raise is correlated to the rate of inflation. The CPI, while not the best or most accurate is the closest index we have to reflecting the price levels in the economy. In 2008, inflation as tested by the CPI was 3.85%. What does that mean? It means on average that the prices you paid for anything rose by 3.85%.
Now, did you get a raise in 2008 of 3.85%? Did your investments gain a return of 3.85% or higher? Most people don't realize that to stay ahead of things, your salary and investments must stay ahead of this rate year after year. $1.00 today won't be worth $1.00 by next year. Some old timers will say its best just to put your money in a mattress and forget about it. Well, believe it or not, there was a story today where someone threw out a mattress that had $1M in it. If that money was put into reasonable investments, it would have been worth a whole lot more. Before you look at your mattress as a safe deposit box, think again.
Is inflation a problem right now? No, it isn't. The question is what happens next year and in 2011, when all of this government stimulus and hopefully improvement in the housing and job market hits. Is that 3.85% rate in 2008 going to balloon up to 7%? Too soon to tell. Hopefully, this blog will make you look at your mattress and balloons for the kids in a different light.
Stay tuned for my next blog when I'll expound on this into specific examples of how inflation hurts you.
Inflation, as measured in the government's monthly reading called the consumer price index, is basically rising prices. Ever notice that when you didn't get a raise, you actually do get a "cost of living" raise? That raise is correlated to the rate of inflation. The CPI, while not the best or most accurate is the closest index we have to reflecting the price levels in the economy. In 2008, inflation as tested by the CPI was 3.85%. What does that mean? It means on average that the prices you paid for anything rose by 3.85%.
Now, did you get a raise in 2008 of 3.85%? Did your investments gain a return of 3.85% or higher? Most people don't realize that to stay ahead of things, your salary and investments must stay ahead of this rate year after year. $1.00 today won't be worth $1.00 by next year. Some old timers will say its best just to put your money in a mattress and forget about it. Well, believe it or not, there was a story today where someone threw out a mattress that had $1M in it. If that money was put into reasonable investments, it would have been worth a whole lot more. Before you look at your mattress as a safe deposit box, think again.
Is inflation a problem right now? No, it isn't. The question is what happens next year and in 2011, when all of this government stimulus and hopefully improvement in the housing and job market hits. Is that 3.85% rate in 2008 going to balloon up to 7%? Too soon to tell. Hopefully, this blog will make you look at your mattress and balloons for the kids in a different light.
Stay tuned for my next blog when I'll expound on this into specific examples of how inflation hurts you.
Wednesday, June 3, 2009
Yields Shmields
What do the Treasury yields have to do with me, you say. I have a trouble rubbing two nickels together, never mind worrying about the budget deficit, national debt and bond yields. Well, think again. The increasing debt burden of the U.S. has a direct effect on American families. How you say?
The federal government is increasingly printing money, yes literally printing money and at the same time is auctioning off Treasury notes and bonds at record pace. What does that mean? If you look at what has happened over the last month or so, the 10 year T-note yield has risen from 2.5% to 3.55% (as of today). The investors who are buying those notes are demanding better returns as they are worried about the inflation and the U.S. growing debt. The 10 year note, dum dum dum, is the benchmark rate for mortgages. It costs you money if you are looking to refi or buy another home. One little watched item is that to keep these yields astronomically low is that the Federal Reserve is buying back the old bonds at the same time they are auctioning off new ones. The buying back is somewhat normal but not at the level they are doing it. I think it was on Friday that 10 year yield was in the 3.71% range.
Now for the right hook to the face; China owns an overwhelming majority of those bonds. They are worried about the US and the value of those bonds. There was a press release reporting that our Treasury Secretary told a Chinese audience that there money was safe invested in the US and there was laughter in the audience. Scary. China has a vested interest in how well we do but they are becoming quite savvy and there could be an unintended shift to another country's debt. The question is who? At this point, no one knows that answer. Next time you scoff about yields, think again.
Stay tuned. My next blog will go into inflation and how putting money under your mattress is the dumbest thing you can do.
The federal government is increasingly printing money, yes literally printing money and at the same time is auctioning off Treasury notes and bonds at record pace. What does that mean? If you look at what has happened over the last month or so, the 10 year T-note yield has risen from 2.5% to 3.55% (as of today). The investors who are buying those notes are demanding better returns as they are worried about the inflation and the U.S. growing debt. The 10 year note, dum dum dum, is the benchmark rate for mortgages. It costs you money if you are looking to refi or buy another home. One little watched item is that to keep these yields astronomically low is that the Federal Reserve is buying back the old bonds at the same time they are auctioning off new ones. The buying back is somewhat normal but not at the level they are doing it. I think it was on Friday that 10 year yield was in the 3.71% range.
Now for the right hook to the face; China owns an overwhelming majority of those bonds. They are worried about the US and the value of those bonds. There was a press release reporting that our Treasury Secretary told a Chinese audience that there money was safe invested in the US and there was laughter in the audience. Scary. China has a vested interest in how well we do but they are becoming quite savvy and there could be an unintended shift to another country's debt. The question is who? At this point, no one knows that answer. Next time you scoff about yields, think again.
Stay tuned. My next blog will go into inflation and how putting money under your mattress is the dumbest thing you can do.
Monday, June 1, 2009
What a day!
Another Monday and yet another big news day. GM filing bankruptcy and the approval of the sale of Chrysler assets to Fiat. The sad part of the GM story is that America is paying through the news to keep this company afloat. I believe the running tally was about $20B sunk into this foundering ship. The PC thing to do was to continue to feed money to this money-sucker and hope, just hope a Chapter 11 didn't come.
Well now, my fellow taxpayers, you own a lot of GM whether you like it or not. GM's problem, IMHO, was that the market made a decision on its products. Once GM got the message, it wasn't nimble nor humble enough to make the necessary changes in its product lineup and more importantly its cost structure. Both management and labor are at fault. A sad casualty of this saga are the lower level workers.
The idea that the government can turn GM around when career automotive executives could not is ludicrous. The reality in today's world is that government can do anything it wants and damn the torpedoes. I wish they would be better stewards of our taxpayer dollars instead of trying to save everybody from everything.
Stay tuned to my next blog about the increasing debt loads and yields and what that means for everybody.
Well now, my fellow taxpayers, you own a lot of GM whether you like it or not. GM's problem, IMHO, was that the market made a decision on its products. Once GM got the message, it wasn't nimble nor humble enough to make the necessary changes in its product lineup and more importantly its cost structure. Both management and labor are at fault. A sad casualty of this saga are the lower level workers.
The idea that the government can turn GM around when career automotive executives could not is ludicrous. The reality in today's world is that government can do anything it wants and damn the torpedoes. I wish they would be better stewards of our taxpayer dollars instead of trying to save everybody from everything.
Stay tuned to my next blog about the increasing debt loads and yields and what that means for everybody.
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