It seems odd that crisis brings out vigorous debate, while good times encourage a certain placidity. Certainly, no one’s ready to say it’s time to jump back in the water again, — the underlying assumptions have not changed. But one has to wonder whether there would be so much spirited comment if there were not crisis.
After the banks: In the U.S., there’s still a surprisingly intense debate on bank bailouts and the size of the stimulus package. In part it is fuelled by worries that the debt-ridden consumer will take a long time to return to health. Former Clinton-era Labor Secretary weighs in:
“Geithner believes the only way to rescue the economy is to get the big banks to lend money again. But he’s dead wrong. Most consumers cannot and do not want to borrow lots more money. They’re still carrying too much debt as it is. Even if they refinance their homes — courtesy of the Fed flooding the market with so much money mortgage rates are dropping — consumers are still not going to borrow more. And until there’s enough demand in the system, businesses aren’t going to borrow much more to invest in new plant or machinery, either.
That’s the big issue — the continued lack of enough demand in the economy. The current stimulus package is proving way too small relative to the shortfall between what consumers and businesses are buying and what the economy could produce at full capacity.
End in sight: And of course, everyone is looking for signs of the beginning of the end. Calculated Risk points to an interesting employment barometer: the four-week moving average of new jobless claims.
“The decline to 610,000 initial claims this week is potentially good news, but this is just one week of data, and this series is very volatile. As I mentioned in End of Recessions and Unemployment Claims, the four-week average of initial weekly unemployment claims is a closely watched indicator of the possible end of a recession. However, we need to see the four-week average decline by 20,000 to 40,000 or more from the peak before we get excited — and so far the four-week average is only off 8,500 from the peak of 659,500 last week.”
Bear wisdom: Some bloggers also have day jobs as money managers. Barry Ritholtz does and he’s been bearish for a while. And, even after March’s rally, he’s still skeptical. Here’s the third part of his investment wisdom for handling different market conditions.
“3) Buying the very bottom isn’t your goal: This often surprises people — they think they should try to buy at the bottom and sell at the top. The problem with this approach is that we don’t know for sure when it’s the bottom or top until after the fact. And even if you nail the low, you may not make any money.
“Here’s an example: In 1966, the Dow first kissed 1,000. It did not get over 1,000 on a permanent basis until 16 years later in 1982.
“But if you managed to catch the exact low in December 1974, well, then, you better have had a strong stomach — the volatility was brutal. That low was followed by a 75% rally, a 27% sell off, a 38% rally and a 24% sell off. But those are nominal numbers. Adjust the returns for inflation, and you actually lost about 75% of your money in real terms. (No thanks!)
“Instead, consider as your goal maximizing your returns on a risk adjusted basis. This means being more conservative with your investments when risk levels are higher, and more aggressive when they are lower. For many investors, dollar cost averaging into broad index funds works well. It is efficient and cost effective. If you want to be a bit aggressive, you can increase your contributions once the markets fall 30% or (like now) 50%. The time to throttle back a bit? After a 4 -7 year bull market run.”
Bubbles and incomes: Overlying the debate on the bank bailout and the urgency of fiscal stimulus is the issue of income inequality. Some frame it in terms of tax policy: there’s not been enough income distribution. Others suggest that higher returns go to those with education. Justin Fox, who writes the Curious Capitalist blog for Time magazine, looks up a different theory:
“The rise in income inequality over the past 30 years has to a significant extent been the product of a series of asset-price bubbles. Whenever the market (be it the market in stocks, junk bonds, real estate, whatever) booms, the share of income going to those at the very top increases. When the boom goes bust, that share drops somewhat, but then it comes roaring back even higher with the next asset bubble. It’s not the same people raking it in every time—there’s lots of turnover in the top 400—but skimming the top off of asset bubbles appears to have become the leading way to get rich in these United States in the past three decades.
“These asset bubbles weren’t pure bubbles. Prices always began rising for some real economic reason, then got out of hand. So in this accounting, the rise in income inequality would be partly based on economic fundamentals, partly on financial market excess. “
The dog that didn’t bark: Then there’s the persisting issue of toxic assets. Some commentators hailed Goldman Sachs’ return to profit this week. But others noticed that it had changed its fiscal year, leaving the month of December as an orphan, an orphan with a big writedown. CFA Rolfe Winkler at OptionARMageddon comments:
“It’s important to put this particular accounting shenanigan into context. Yeah, it’s underhanded to play games like this in order to enhance reported earnings; investors hate this kind of thing. [An analyst at my old firm once yelled at a CEO on a conference call when he noticed an extra day was added to a quarter in order to boost profits. We were long-term holders of the stock. In such cases, management credibility is more valuable than an extra penny of ‘earnings.’ But I digress.]
“Smart investors, however, pay less attention to accounting profits, since these can be manipulated so easily by management. Instead, they focus on the balance sheet and the cash flow statement. Whether Goldman chose to write down a particular asset in the ‘missing month’ of December or during Q1 makes little difference for balance sheet purposes.
“So for instance, take OA’s favorite metric: tangible assets/tangible common equity. Writedowns are problematic because they hit the numerator and denominator by equal amounts, more or less. And when you’re talking about a grossly over-leveraged institution like a bank, a 5% writedown of assets can wipe out 100% of TCE. [Remember: a million-dollar house with a $950k mortgage need only fall 5% in value to wipe out 100% of the homeowner’s equity.]”
Shelter in the storm: To close, a sly comment on islands of stability in today’s chaotic world, from Paul Kedrosky at Infectious Greed:
“Carl Bass of Autodesk was quoted this weekend in Barron’s as having spanked an analyst during a recent quarterly conference call. When asked whether any Autodesk sectors had been immune to the global slump, he said the following:
‘Well, I think Antarctica has been relatively immune, maybe Greenland, as well, although not Iceland, as we all found out.’
“It’s a good line, but it got me thinking about Greenland and Antarctica’s respective economies. Both are somewhat tricky, with, for example, the latter not really having an economy.”
(04/17/09)